The B.E. Journal of Macroeconomics (Advances), Vol. 10, Issue 1, 2010 Art. 28 - Arrow Prize for junior economists 2010. (with Burc Kayahan and Miana Plesca)  

The literature on training has pointed out that macroeconomic fluctuations can have a positive or a negative effect on training decisions.

On the one hand, the opportunity cost to train is lower during downturns, and thus training should be counter-cyclical. On the other hand, a positive shock may be related to the adoption of new technologies and increased returns to skill, making training incidence pro-cyclical. The first contribution of this paper is to document, using the Canadian panel of Workplace and Employee Survey (WES), that (i) training moves counter-cyclically with aggregate output fluctuations (more training in downturns), while at the same time (ii) the relative position of sectoral output has a positive impact on training decisions (more training in sectors doing relatively better). This second fact is novel and unexplored. Overall, the results show that the firms’ decisions to train are quite complex; in order to fully understand them, one needs to take into account not only the change in aggregates, but also the relative position of each sector in the economy. The second contribution of the paper is to illustrate the mechanisms at work by incorporating training decisions into a standard Mortensen-Pissarides model. In the standard model, production takes place if workers’ productivity is above a reservation threshold. In our extension, this threshold gets expanded into a whole interval within which production takes place if workers are trained. The quantitative analysis from the calibrated model illustrates the counter-cyclical opportunity cost adjustment from aggregate shocks and the pro-cyclical adjustment coming from sectoral reallocation.