This opening chapter on market failures has two important purposes: (i) it sets out a critique of the standard analysis skill of skills acquisition, namely, that of Gary Becker's human capital theory and, on this basis, (ii) it shows how firms' opportunities to poach trained employees generally leads to under-investment in skills.

It is argued that most training is not ‘general’ (useful to all firms in the economy) or ‘specific’ (of use only to one specific firm). Rather, most training falls between these two extremes; it is ‘transferable’, in that it is useful to a limited number of firms – and, among these, more useful to some firms than to others. Becker showed that the free market provides sufficient incentives for acquiring skills when all training is either general or specific. It is wrong, however, to imply that all training can simply be decomposed into general and specific components, so that the market mechanism generates sufficient skills in the intermediate cases.

This chapter concentrates on one specific flaw in this argument: when training is transferable among firms and these firms have some market power in setting wages, the potential benefits from training accrue not only to the firm providing it and the worker acquiring it, but also to the other firms that can poach the trained workers. And since some of the benefit from training falls on the poachers, there is no way for the worker demanding the training and the firm supplying it to capture all the rewards from this training. Inevitably, therefore, the free market mechanism provides insufficient incentives to acquire skills.