Training and Pensions: Substitutes or Complements

Abstract

We compare firm-optimizing and institutional models of labor contracts to investigate how certain types of pension plans affect training. Unlike previous studies, we consider an expanded voice model of training and pension coverage in which worker and union preferences feed back upon firm decisions, and we test for this bi-directional causality between pensions and training. The data consist of merged 1991 CPS samples, using the January training supplement and the March and April files, which contain information on pension coverage and union membership. When pension coverage is treated as endogenous in a two-stage least squares regression, pensions have a negative effect upon training, and they can be viewed as substitutes. This finding is inconsistent with the standard view that firms optimize training expenditures by providing pensions. In contrast, when pension coverage is in a defined benefit multi-employer plan, training and pensions are complements, consistent with both optimizing and institutional models.

JEL Classification: J26, J60