Premature Contract Termination in VET - a Job Matching Approach

In the German system of vocational education and training (VET), apprentices receive both a general school-based education as well as an on-the-job training at their training firm. More than 50% of high school graduates enter such a program after school. Being such an important part of the German education system its efficiency in guiding young persons towards obtaining a vocational degree is a key target for political action.

However, when applicant and company meet they have insufficient knowledge about each other. With little or no work experience or understanding of the task contents of the training occupation not only the applicant but also the company incur a risk of poor match quality. In poor matches firms forego gains from productivity and workers from earnings over their life cycle. Knowledge on match quality is only learned over time when working together. When the confidence in match quality falls below an individual threshold, matches are terminated. About a fifth of all contracts end before successful program completion, however occupational choice can hardly be compared with job shopping of labor market entrants as most apprentices in fact stay in their first match.

I propose a theoretical model following the job-matching approach, which predicts the key determinants for premature contract termination. Focusing on the learning mechanism and the risk sharing nature of VET programs, I can illustrate how wage shocks for skilled employees and financial motivation affect the termination decision more than the recent literature accounts for. I already validated this theoretic result empirically using aggregate data from official statistics. For causal inference, in the next step I will evaluate this model against individual level spell data.