Wage Competition with Heterogeneous Workers and Firms

We study imperfect competition in the labor market when worker skills are continuously distributed within the population and a finite number of firms have different job requirements. The cost of training a worker depends on the difference between this worker's skill and the employer's needs. When firms cannot identify worker training costs in advance, firms pay workers equal wages, but workers absorb training costs. When firms can identify worker types before employment, firms can pay different net wages to workers with different training costs. Voters select the level of general education which is financed by a lump-sum tax. Workers are on average better off when firms can observe workers' skill for a given level of human capital, but the median voter prefers a higher level of general human capital when firms cannot observe worker types.