The low skill trap

Recently, it has become popular to argue that certain workers have fallen into a trap in which they have poor skills, few job opportunities and a low return on training, while others have not. This paper demonstrates how such a trap can occur within a simple matching model with rent sharing. Rent sharing diminishes the worker's incentive to acquire skills; however, since firms also benefit from training, rent sharing likewise induces job creation. The subsequent improved matching prospects may offset the initial disincentive to invest. However, for this mechanism to be effective, firms and workers must coordinate their actions. If they do not, the trap occurs. (C) 2002 Elsevier Science B.V. All rights reserved.