Abstract
The current economy is subject to great uncertainty. Smooth labor reallocations are important. This calls for labor market policies that increase flexibility. Conventional wisdom suggests that such policies will increase general skills and reduce firm-specific skills. This study demonstrates that this conjecture is not a theoretical necessity. Indeed, increased labor market flexibility can depress both general and firm-specific skills. If flexibility increases in the experienced worker market, general and firm-specific skills increase or decrease simultaneously. The reason for this surprising outcome emerges from the model.
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Notes
Ljungqvist and Sargent (1998) conducted a study based on a such a notion.
Maki et al. (2005) developed a model in which workers face risks to their firm-specific skills, and pointed out the importance of general skills to enhance economic growth.
This implies that a well-functioning external labor market can improve in-house skill formation. In Ramey and Watson (1997), there is a case where a low level of labor market friction leads to a higher level of firm-specific skills.
Abe (2010) pointed out that an amendment to the worker dispatch law in 1999 may have contributed to an increase in non-regular employment.
Presented is a simple regression analysis using Japanese Government Statistics, specifically the School Basic Survey (e-Stat, 2023a) and the Survey on Employment Trends (e-Stat, 2023b). Cross-section data from 47 prefectures in Japan were utilized for men. By taking the ratio of new senior high school graduates in March 2013 advancing to university (and similar institutions) as a dependent variable, and using the separation rate in 2012 as an explanatory variable, a regression analysis was conducted. The results indicate that the separation rate adversely influences the advancement rate, with a statistical significance level of 1%. This implies that a prefecture with a higher separation rate tends to have a diminished advancement rate, aligning with the findings of this paper. While this empirical exercise, when not meticulously examined, might not robustly support the study's outcomes, it does hint at the potential real-world functionality of the proposed mechanism.
Ramey and Watson (1997) presented a case where firm-specific skills increased in the less frictional labor market.
Under an assumption that general skills and firm-specific skills are technologically complementary, Acemoglu and Pischke (1999) showed that the existence of firm-specific skills induces firms to sponsor investments in general skills, but they did not consider the effects of labor market frictions in this analysis.
In Shintoyo (2000), the level of firm-specific skills is an exogenous variable.
To consider skill formation in the simplest possible manner, difficulties associated with employment contracts are ignored. It is assumed that firm-specific skills are contractible.
As long as the joint surplus is shared according to the Nash bargaining solution, wages in the first period and the second period do not change the results and, therefore, are left out of consideration.
It may seem reasonable to alternatively assume that firm-specific skills are not useful in the first period, which is considered the training period. Since this study considers how general and firm-specific skills respond, the two types of skill are treated equivalently in terms of the potentially available period.
Following Wasmer (2006), an additive productivity shock is assumed.
As there is no chance of matching after the experienced worker market is closed, the outside option values for the worker and the firm are zero. Therefore, output value g is split between the worker and the firm in the proportion of β and 1-β.
Failure of bargaining implies that the worker earns an expected payoff qβg in the second period, whereas the profit of the firm that exits the economy is zero.
The worker’s utility in case of unstable employment is.
\(U_{u} = p(q\beta g + \beta \pi_{u}^{*} ) + (1 - p)q\beta g - 0.5ag^{2}\).
Note that employment does not become unstable when Us* > Uu*. Suppose that πs* < πu* with g = gs. Then, Uu* > the worker’s utility level in case g = gs and unstable employment > Us*, which contradicts the assumption of Us* > Uu*. Similarly, unstable employment is realized when Us* < Uu*.
For example, when a = 1, b = 1, β = 0.5, λ = 0.2, d = 2.4, and p = 0.5, the graph of Y crosses the horizontal axis at two points with q being between 0 and 1.
There is a case where the value of gs with q = q1 > the value of gu with q = q2.
Y can be always positive or negative with q being between 0 and 1, which can be confirmed by adjusting the value of d. To consider a change of the stability of employment, the cases where the graph of Y crosses the horizontal axis with q being between 0 and 1 are focused on.
If this condition is satisfied, an appropriate value of d has an upward-sloping graph of Y crossing the horizontal axis with q being between 0 and 1.
For example, when a = 1, b = 1, β = 0.3, λ = 0.2, d = 2.2, and p = 0.3, an upward-sloping graph of Y crosses the horizontal axis at one point with q being between 0 and 1.
It is possible that Y is always positive or negative with p being between 0 and 1. For example, when a = 1, b = 1, β = 0.5, q = 0.9, and λ = 0.25, one can make a case where Y is always positive (Fig. 3), and a case where Y is always negative by adjusting the value of d. To consider a change in the stability of employment, the case of Fig. 3 is focused on.
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Acknowledgements
I am deeply grateful to an anonymous referee and Real Arai for their helpful comments. The constructive suggestions of an anonymous referee greatly improved the paper. All remaining errors are mine.
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Shintoyo, N. Labor Market Flexibility and General and Firm-specific Skills. Atl Econ J 51, 275–286 (2023). https://doi.org/10.1007/s11293-023-09783-8
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DOI: https://doi.org/10.1007/s11293-023-09783-8