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IZA
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Interpreting Europe and US Labor Markets Differences: The Specificity of Human Capital Investments
by
Etienne Wasmer
(August 2002)
revised version published in: American Economic Review, 2006, 96 (3), 811-831
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) favors specific human
capital investments. This conjecture provides, among other things, a rationale for differences
in labor mobility and reallocation costs, which are typically ignored in American ’International
Trade’ textbooks while considered as 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 labor markets, and in particular, frictions and
slackness of the labor market raises 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 labor 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 labor 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.
Text: See Discussion Paper No. 549
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