Uncertainty in Labor Productivity and Specific Human Capital Investment

Chong-En Bai and Yijiang Wang

Journal of Labor Economics, 2003, vol. 21, issue 3, 651-676

Abstract: Uncertainty in labor productivity (ULP) is affected by many factors, such as worker-employer matching, technology, and macroeconomic conditions. Not surprisingly, ULP varies across firms, industries, and economies. How do variations in ULP affect specific human capital (SHC) investment, wage, and labor turnover? A fixed-wage model is used to show that the answer depends critically on the initial level of ULP. The model is also used to show that wage and SHC are always positively correlated, but SHC investment and labor turnover do not have a monotonic relationship. These results have implications for empirical studies and public policies affecting ULP.

Date: 2003
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