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Oxford professor Ewart Keep writes in a paper titled Market Failure in Skills (p. 3) that

For firms there is the problem of investment in staff who may leave taking their skills with them.

Some of the historical solutions to this problem involve limiting the mobility of the labor force, ranging from slavery, indentured servitude, and more recently some kinds work visas that are only valid for one employer.

So in this sense, some human rights are bad for markets, leading to certain kind of market failure. Is this view uncontroversial among economists? And a complementary question: can measures that limit worker mobility also result in other way in market failure?

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    $\begingroup$ It's worth noting that this market failure only exists if the person themselves can't invest in their own skills, and today by and large they can do this. The opinion that this is a significant market failure that must be corrected by restricting labor mobility is certainly not commonly held in the profession. $\endgroup$
    – Ege Erdil
    Jun 10, 2018 at 4:14
  • $\begingroup$ @Starfall, even if they can't invest in their own skills they should usually be able to accept lower wages in exchange for training. More generally, this problem is solved without restrictions on switching firms. Instead, they back load compensation towards later in life. Under pay now, relative to marginal product, during human capital formation, and overpay later once those skills are fully developed. That's usually the justification for Japanese life-cycle pay practices at large conglomerates. $\endgroup$
    – BKay
    Jul 10, 2018 at 15:29

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Well, from the same paper (p. 5), it's not all that clear that the theory translates to actual market failure:

There is very little reliable data on either the scale of poaching or its impact upon employers’ training decisions – despite this being frequently adduced by policy makers as the prime cause of market failure in training. One of the few recent surveys to touch on the issue (4) suggested that poaching was a serious problem for no more than about one per cent of the employers in the sample, whereas an earlier survey of employers suggested that the possibility of poaching had discouraged as many as 38% from investing in skill (5).

The references cited for data being:

(4) J. Kitching and R. Blackburn. 2002. ‘The Nature of Training and Motivation to Train in Small Firms’, DfES Research Report RR330, Nottingham: DfES.

(5) Training Agency. 1989. Training in Britain, London: HMSO.

I think this constitutes a partial answer, but I'm quite interested in more data, in particular from other countries.


And, yes, as I suspected, labor immobility is also a form (perhaps less controversial) of market failure. But this does in turn raise the interesting question whether you can fix one market failure without causing another (in the labor market).

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Labor mobility is unequivocally not a market failure.

The 3 types of market failures are:

  1. Externalities
  2. Anti-competitive markets
  3. Suboptimal initial resource allocation

Gaining vocational skills is none of these 3 things. When a person gains skills, that gives them value because they can be more productive and therefore can command a higher pay. This is clearly not an externality, the skill learner has full incentives to gain skills that are worth gaining. If a company trains their employees, there is some potential friction there, but again, these are consensual actions where companies train their employees expecting that they'll be more productive because of it. This is also not an externality.

If training was actually being wasted by employees leaving right after they're trained, companies would simply find another way to operate, for example by requiring employees to pay for their training in some way (or forgo full wages until their training is complete). There is no reason to expect that people are actually learning lower than optimal levels of skills for any reason of market failure.

More likely, the reason is actually one of a lack of knowledge. People have limited knowledge and a limited ability to analyze their opportunities. People will inevitably make mistakes and do things that are suboptimal. However, this is not a market failure. The cost of acquiring more knowledge and more carefully analyzing opportunities is costly, and many people rationally choose not to bear those costs when they believe they aren't worth it.

The fact that some external person can say people should get more training is immaterial. Market failure is not simply suboptimal behavior, it is something much more than that.

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