Working Paper: CEPR ID: DP14846
Authors: Matthias Doepke; Ruben Gaetani
Abstract: Why has the college wage premium risen rapidly in the United States since the 1980s, but not in European economies such as Germany? We argue that differences in employment protection can account for much of the gap. We develop a model in which firms and workers make relationship-specific investments in skill accumulation. The incentive to invest is stronger when employment protection creates an expectation of long-lasting matches. We argue that changes in the economic environment have reduced relationship-specific investment for less-educated workers in the United States, but not for better-protected workers in Germany.
Keywords: college wage premium; employment protection; job-specific skills
JEL Codes: E24; J24; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Differences in employment protection between the U.S. and Germany (J53) | College wage premium (J31) |
| Employment protection (J68) | Firms' and workers' incentives to invest in relationship-specific skills (J24) |
| Firms' and workers' incentives to invest in relationship-specific skills (J24) | Job tenure and skill accumulation (J24) |
| Employment protection (J68) | Job tenure and skill accumulation (J24) |
| Economic shocks (F69) | College wage premium (J31) |
| Employment protection (J68) | Different dynamics in skill investment and job tenure (J29) |