Investment in General and Specific Human Capital: Social Optimality via Labor Turnover

Abstract

Extending the model proposed by (Acemoglu D and Pischke J-S (1999) J Political Econ 107(3):539–572), this chapter analyzes the relationship between labor turnover and human capital investment by firms. While (Acemoglu D and Pischke J-S (1999) J Political Econ 107(3):539–572) assume an imperfect labor market with wage contract friction, we assume a competitive labor market. Workers acquire firm-specific and general skills through firms’ human capital investment. After acquiring skills, some workers leave their firms as the result of wage bargaining, while others remain. Workers’ decisions depend crucially on the degree to which their skills are “adaptable” to other firms. A firm’s estimate of its degree of adaptability is a key factor in determining its human capital investment. Since each firm invests in human capital to increase its own profits, it decreases investment in human capital in the presence of high labor mobility. However, the productivity of the entire economy increases through reallocation of labor. In general, firms consider the possibility that their workers will change jobs; thus, their human capital investments are lower than the socially optimal levels. This chapter examines which contribute more to social welfare: workers’ specific skills or general skills. The results reveal the presence of the ratio of specific skills to general skills that maximizes social welfare when labor market is in a seller’s market.