ECON 1101 Study Guide - Summer 2019, Comprehensive Final Exam Notes - Quarterly Journal Of Economics, Root Mean Square, Endogenous Growth Theory

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30 Nov 2019
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1 Goal of this lecture
Review basic Becker story
Consider stylized model of general skills training in a competitive labor market.
Add various labor market perfections to the model to consider how they alter rms’
training decisions:
Search costs and other wedges
Search costs that dier by worker skill level
Exogenous turnover
Nash bargaining
Minimum wages
Asymmetric informationAdverse selection
Goal is to understand who pays for general skills training, and what are the eciency
consequences. As it turns out, market structure and training provision are tightly linked,
an insight originally due to Becker. Deviating from either the perfectly competitive or
pure monopsony cases studied by Becker gives rise to interesting and general insights
about wage structure, market institutions, private information, and training provision.
An interesting feature of the modern literature is its implicit focus on the limitations
of contracting. Becker considered one specic contracting problem — holdup of rm by
workers. It turns out, this problem is richer than Becker may have seen at that time.
1.1 Basic model
Denition 1 Generals skills — Skills useful to many employers (“many buyers”).
Denition 2 Specic skills — Skills with exactly one buyer.
Timeline
2
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1. t=1. Training and production (human capital investments sunk). Workers produce
output yand receive training τat cost c(τ).
2. t=1.5. Workers face option to leave rm.
3. t=2. Production takes place again. Worker produces output y+f(τ)at any rm
(general training).
Assume: f0(τ)>0,c(0) = c0(0) = 0 and c0(τ)>0,c
00(τ)>0,c
0(τ)
τ→∞
→∞.
1.2 Basic Becker insight: Holdup
FOC social optimum for training? c0(τ)=f0(τ).
Howdoweknowthatτ>0?
Can rm pay worker w1=y,w2=y+f(τ)c(τ)?
Basic insight of Becker model: In a competitive labor market, employers will not pay
for general human capital. The problem is “holdup.” Since the worker’s opportunity
(outside) wage rises by f(τ)with training, rm must pay w2=y+f(τ)or lose employee
to a competitor.
Q: Since employers unwilling to fund socially productive training, is this a market fail-
ure? A: Worker is full residual claimant to returns from training investments Ecient
incentive for worker to make the investments.
Two canonical solutions to this problem:
1. Direct investments by workers — School, training programs, etc.
2. Indirect payment to employer: Training wage. Hence:
w1=yc(τ),w
2=y+f(τ).
Just to check intuition:
3
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