A high proportion of skilled workers in the labor force implies a large market size for skill-complementary technologies, and encourages faster upgrading of the productivity of skilled workers. As a result, an increase in the supply of skills reduces the skill premium in the short run, but then it induces skill-biased technical change and increases the skill premium, possibly even above its initial value. This theory suggests that the rapid increase in the proportion of college graduates in the United States labor force in the 1970s may have been a causal factor in both the decline in the college premium during the 1970s and the large increase in inequality during the 1980s.

This paper offers a theory of training whereby workers do not pay for the general training they receive. The superior information of the current employer regarding its employees' abilities relative to other firms creates ex post monopsony power, and encourages this employer to provide and pay for training, even if these skills are general. The model can lead to multiple equlibria. In one equilibrium quits are endogenously high, and as a result employers have limited monopsony power and provide little training, while in another equilibrium quits are low and training is high. Using microdata on German apprentices, we show that the predictions of our model receive some support from the data.