Wage Differentiation via Subsidised General Training

We provide a new explanation for why firms pay for general training in a competitive labor market. If firms for informational or institutional reasons are unable to tailor wages according to ability, they will have an incentive to pay for general training in order to attract better quality workers. Under fairly weak conditions, we show that labor market equilibrium must involve subsidised general training. This does not require that firms capture a return in the form of a productivity rise induced by training that exceeds the wage rise. The market provision of training may well exceed the socially optimal level.