Training and worker effort: a signalling perspective

This paper analyzes the interaction between firms' investment in general skills training and workers' incentives. It shows that when a firm has an informational advantage over its workers, its provision of free general skills training can serve as a signal that there will be a long-term relationship between the firm and its workers. This signal induces the workers to exert more effort in learning firm-specific skills, which enhances the firm's profits. In contrast with most of the existing literature, the model implies that firms may provide free general skills training even if there is no labour market friction.