[This paper presents an implicit-contract model in which workers are allowed to differ in both their productive abilities and their preferences. It is shown that if firms are able to vary hours costlessly among their workers, workers are risk averse, and there are no outside payments to laid-off workers, then efficient contracts between firms and their workers will never provide for layoff unemployment. If, however, such hours variations are not costless, layoffs are no longer generally inefficient since they are an alternative means by which firms can adjust the labor inputs of selected groups of workers.]

Data from the National Longitudinal Survey of Youth indicate that the employer often pays the explicit costs of not only on‐site training but also off‐site general training. Although few of these costs appear to be passed on to workers in the form of a lower wage while in training, completed spells of general training paid for by previous employers have a larger wage effect than completed spells of general training paid for by the current employer. A model where contract enforcement considerations cause employers to share the costs and returns to purely general training can explain these findings.

Conventional analysis predicts that workers pay part of their on-the-job training costs by accepting a lower starting wage and subsequently realize a return to this investment in the form of greater wage growth. Missing from the conventional treatment of on-the-job training is a discussion of the process by which heterogeneous workers are matched to jobs requiring varying amounts of training. This matching process constitutes a key feature of the on-the-job training model presented in this article and tested with a unique data set containing extensive information concerning on-the-job training, employer search, wages, and wage and productivity growth.

An employer must choose a procedure for screening job applicants, a rate of hire, a training program for new employees, a criterion for the retention of new employees after observing their on-the-job performance, a compensation package, and a rate of capital investment so as to minimize production costs across time. This paper examines the effects of employer size on these hiring and training decisions when larger employers have greater monitoring costs. A unique data set is employed to estimate the empirical relation among employer size and employer search, training, capital investment, and wages.