DP3780 Interpreting European and US Labour Market Differences: The Specificity of Human Capital Investments

Author(s): Etienne Wasmer
Publication Date: January 2003
Keyword(s): general human capital, matching, specific human capital, training, unemployment
JEL(s): J30, J63
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3780

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.