A framework for understanding differences in labor turnover and human capital investment

Abstract

We analyze the causes and the welfare consequences of international differences in labor turnover and human capital investment. The framework incorporates different views as special cases. Conditions are identified under which multiple equilibria or differences in deep economic parameters explain the observed differences in labor practices. We show that when there is an informational problem regarding job-changing workers' quality, general human capital, like firm-specific human capital, can also affect labor turnover, and that better job matching is obtained at the expense of lower human capital investment. Given multiple equilibria, a high turnover equilibrium is found superior in the Pareto sense to a low turnover equilibrium if matching uncertainty is large. The reverse is true when matching uncertainty is small.