Working Paper: CEPR ID: DP3780
Authors: Etienne Wasmer
Abstract: This Paper suggests that in the US context, workers tend to invest in general human capital especially since they face little employment protection and low unemployment benefits, while the European model (generous benefits and higher duration of jobs) favours specific human capital investments. This conjecture provides, among other things, a rationale for differences in labour mobility and reallocation costs, which are typically ignored in American ?International Trade? textbooks yet figure extremely large in the public debate in Europe.The main argument is based on a fundamental property of human capital investments: they are not independent of the aggregate state of labour markets, and, in particular, frictions and slackness of the labour market raise the returns to specific human capital investments relative to general capital investments. This is a property that Becker?s seminal contributions could not envisage in the context of perfect labour markets.Two sets of implications are then derived: on one hand, mobility costs are high in Europe and transitions between steady-states has especially strong adverse effects. Jobs endogenously last longer in Europe than in the US, but when they are destroyed, the welfare loss for workers is higher. On the other hand, in the steady-state, European workers, ceteris paribus, are more efficient. In terms of transaction costs, the US pay on average higher search/hiring costs in the labour market, and smaller training costs, so that the welfare implications of each type of economy are a priori ambiguous: no model dominates the other one, and each one has its own coherence, although the European one is more fragile when macroeconomic conditions change.
Keywords: general human capital; matching; specific human capital; training; unemployment
JEL Codes: J30; J63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Employment protection (J68) | Type of human capital investment (J24) |
| Higher employment protection (J68) | Specific human capital investment (J24) |
| Lower employment protection (J63) | General human capital investment (J24) |
| Higher job mobility (J62) | General human capital investment (J24) |
| Specific human capital investment (J24) | Longer job tenures (J63) |
| Job security (J28) | Specific human capital investment (J24) |
| Lower turnover (M51) | Specific human capital investment (J24) |
| Higher unemployment benefits (J65) | Specific human capital investment (J24) |
| Lower unemployment benefits (J65) | General human capital investment (J24) |
| Type of human capital investment (J24) | Labor mobility (J62) |
| Labor mobility (J62) | Reallocation costs (D61) |
| Specific human capital investment (J24) | Welfare loss when jobs are lost (F66) |