Training and Hysteresis Effects on the Wage Inflation - Unemployment Relationship

Abstract

This paper develops a model that shows how training costs incurred by firms alters the relationship between wage inflation and unemployment. During an upswing, firms will take on and train new workers. These workers are, however, not shed during a following downswing. This is due to the lump sum training cost forcing a wedge between the level of demand that triggers a firm to begin training new workers and that which triggers them to shed trained workers. This has important policy implications as it gives a renewed role to demand side policy in enhancing labour market flexibility, whilst at the same time reinforcing the value of supply-side incentives to train and educate workers.

Keywords: Wage inflation, unemployment, human capital, training, hysteresis

JEL Classification: J31