IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/98027.html
   My bibliography  Save this paper

Specific Human Capital and Real Wage Cyclicality: An Application to Postgraduate Wage Premium

Author

Listed:
  • Gu, Ran

Abstract

This paper examines how specific human capital affects labour turnover and real wage cyclicality in a frictional labour market. I develop an equilibrium search model with long-term contracts and imperfect monitoring of worker effort. Imperfect monitoring creates a moral hazard problem that requires firms to pay efficiency wages. The optimal contract implies that more specific capital reduces job separation, thereby alleviating the moral hazard and increasing wage stability over the business cycle. I apply this model to explain novel stylised facts about the cyclicality of the postgraduate-undergraduate wage premium. Postgraduate degree holders experience lower cyclical variation in real wages than those with undergraduate degrees. This effect is significant for workers with a long tenure, but not for new hires. Moreover, postgraduates have more specific human capital than undergraduates. Estimates reveal that specific capital can explain the educational gaps both in labour turnover and in real wage cyclicality.

Suggested Citation

  • Gu, Ran, 2019. "Specific Human Capital and Real Wage Cyclicality: An Application to Postgraduate Wage Premium," MPRA Paper 98027, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:98027
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/98027/1/MPRA_paper_98027.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/110142/8/MPRA_paper_110142.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael P. Keane & Eswar S. Prasad, 1991. "The relation between skill levels and the cyclical variability of employment, hours and wages," Discussion Paper / Institute for Empirical Macroeconomics 41, Federal Reserve Bank of Minneapolis.
    2. repec:hal:spmain:info:hdl:2441/eu4vqp9ompqllr09j003nctkn is not listed on IDEAS
    3. Christopher Phelan & Robert M. Townsend, 1991. "Computing Multi-Period, Information-Constrained Optima," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(5), pages 853-881.
    4. Lustig, Hanno & Syverson, Chad & Van Nieuwerburgh, Stijn, 2011. "Technological change and the growing inequality in managerial compensation," Journal of Financial Economics, Elsevier, vol. 99(3), pages 601-627, March.
    5. Gary Solon & Robert Barsky & Jonathan A. Parker, 1994. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 1-25.
    6. Jean‐Marc Robin, 2011. "On the Dynamics of Unemployment and Wage Distributions," Econometrica, Econometric Society, vol. 79(5), pages 1327-1355, September.
    7. Matthew J. Lindquist, 2004. "Capital-Skill Complementarity and Inequality Over the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 519-540, July.
    8. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, vol. 115(2), pages 293-346, August.
    9. Almut Balleer & Thijs van Rens, 2013. "Skill-Biased Technological Change and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1222-1237, October.
    10. Shouyong Shi, 2009. "Directed Search for Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 77(2), pages 561-584, March.
    11. Chapman, Bruce J & Tan, Hong W, 1980. "Specific Training and Inter-Industry Wage Differentials in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 371-378, August.
    12. Robert Shimer, 2012. "Reassessing the Ins and Outs of Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
    13. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468-510.
    14. Fatih Guvenen & Serdar Ozkan & Jae Song, 2014. "The Nature of Countercyclical Income Risk," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 621-660.
    15. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, vol. 98(5), pages 1887-1921, December.
    16. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, April.
    17. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
    18. Joseph G. Altonji & Nicolas Williams, 2005. "Do Wages Rise with Job Seniority? A Reassessment," ILR Review, Cornell University, ILR School, vol. 58(3), pages 370-397, April.
    19. Ammermueller, Andreas & Kuckulenz, Anja & Zwick, Thomas, 2009. "Aggregate unemployment decreases individual returns to education," Economics of Education Review, Elsevier, vol. 28(2), pages 217-226, April.
    20. Joseph G. Altonji & Robert A. Shakotko, 1987. "Do Wages Rise with Job Seniority?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(3), pages 437-459.
    21. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-689, August.
    22. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2014. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," American Economic Review, American Economic Association, vol. 104(7), pages 2075-2126, July.
    23. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 145-176, February.
    24. Joanne Lindley & Stephen Machin, 2016. "The Rising Postgraduate Wage Premium," Economica, London School of Economics and Political Science, vol. 83(330), pages 281-306, April.
    25. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-688, August.
    26. Michael Keane & Eswar Prasad, 1993. "Skill Levels and the Cyclical Variability of Employment, Hours, and Wages," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 711-743, December.
    27. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2012. "Taxation and Household Labour Supply," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(3), pages 1113-1149.
    28. Lagakos, David & Ordoñez, Guillermo L., 2011. "Which workers get insurance within the firm?," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 632-645.
    29. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
    30. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-438, April.
    31. Sam Schulhofer-Wohl, 2011. "Heterogeneity and Tests of Risk Sharing," Journal of Political Economy, University of Chicago Press, vol. 119(5), pages 925-958.
    32. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    33. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    34. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    35. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," NBER Chapters, in: Investment in Human Beings, pages 9-49, National Bureau of Economic Research, Inc.
    36. repec:hal:wpspec:info:hdl:2441/eu4vqp9ompqllr09j003nctkn is not listed on IDEAS
    37. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    38. Richard Blundell & Claire Crawford & Wenchao Jin, 2014. "What Can Wages and Employment Tell Us about the UK's Productivity Puzzle?," Economic Journal, Royal Economic Society, vol. 0(576), pages 377-407, May.
    39. Hilary Hoynes & Douglas L. Miller & Jessamyn Schaller, 2012. "Who Suffers during Recessions?," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 27-48, Summer.
    40. Judith M. Delaney & Paul J. Devereux, 2019. "More Education, Less Volatility? The Effect of Education on Earnings Volatility over the Life Cycle," Journal of Labor Economics, University of Chicago Press, vol. 37(1), pages 101-137.
    41. Cynthia L. Doniger, 2019. "Do Greasy Wheels Curb Inequality?," Finance and Economics Discussion Series 2019-021, Board of Governors of the Federal Reserve System (U.S.).
    42. Eric T. Swanson, 2007. "Real Wage Cyclicality In The Panel Study Of Income Dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 617-647, November.
    43. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 599-617.
    44. Kunio Tsuyuhara, 2016. "Dynamic Contracts With Worker Mobility Via Directed On‐The‐Job Search," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 1405-1424, November.
    45. Rudanko, Leena, 2009. "Labor market dynamics under long-term wage contracting," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 170-183, March.
    46. Thibaut Lamadon, 2014. "Productivity Shocks, Dynamic Contracts and Income Uncertainty," 2014 Meeting Papers 243, Society for Economic Dynamics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ran Gu, 2023. "Human Capital and the Business Cycle Effects on the Postgraduate Wage Premium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 345-376, April.
    2. Gu, Ran, 2019. "Specific Capital, Firm Insurance, and the Dynamics of the Postgraduate Wage Premium," MPRA Paper 96254, University Library of Munich, Germany.
    3. Philip Jung & Moritz Kuhn, 2019. "Earnings Losses and Labor Mobility Over the Life Cycle," Journal of the European Economic Association, European Economic Association, vol. 17(3), pages 678-724.
    4. Judith M. Delaney & Paul J. Devereux, 2019. "More Education, Less Volatility? The Effect of Education on Earnings Volatility over the Life Cycle," Journal of Labor Economics, University of Chicago Press, vol. 37(1), pages 101-137.
    5. Domenico Ferraro, 2018. "The Asymmetric Cyclical Behavior of the U.S. Labor Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 145-162, October.
    6. Jonathon Hazell & Bledi Taska, 2020. "Downward Rigidity in the Wage for New Hires," Discussion Papers 2028, Centre for Macroeconomics (CFM).
    7. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 7, pages Pages: 61, Elsevier.
    8. Leena Rudanko, 2008. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," Boston University - Department of Economics - Working Papers Series wp2008-009, Boston University - Department of Economics.
    9. Christopher A. Pissarides, 2009. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," Econometrica, Econometric Society, vol. 77(5), pages 1339-1369, September.
    10. Yicheng Wang, 2015. "Can Wage Dynamics in Long-term Employment Relationships Help Mitigate Financial Shocks?," 2015 Meeting Papers 1189, Society for Economic Dynamics.
    11. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    12. Barrela, Rodrigo & Costa, Eduardo & Portugal, Pedro, 2024. "On the Asymmetrical Sensitivity of the Distribution of Real Wages to Business Cycle Fluctuations," IZA Discussion Papers 16911, Institute of Labor Economics (IZA).
    13. Thibaut Lamadon, 2014. "Productivity Shocks, Dynamic Contracts and Income Uncertainty," 2014 Meeting Papers 243, Society for Economic Dynamics.
    14. Kudlyak, Marianna, 2014. "The cyclicality of the user cost of labor," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 53-67.
    15. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2011. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment," American Economic Review, American Economic Association, vol. 101(7), pages 2873-2898, December.
    16. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 105(10), pages 3030-3060, October.
    17. Ludo Visschers & Carlos Carrillo-Tudela, 2011. "Unemployment and Endogenous Reallocation over the Business Cycle," 2011 Meeting Papers 1101, Society for Economic Dynamics.
    18. Martins, Pedro S. & Solon, Gary & Thomas, Jonathan P., 2010. "Measuring What Employers Really Do about Entry Wages over the Business Cycle," IZA Discussion Papers 4757, Institute of Labor Economics (IZA).
    19. Haefke, Christian & Sonntag, Marcus & van Rens, Thijs, 2013. "Wage rigidity and job creation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 887-899.
    20. Neele Balke & Thibaut Lamadon, 2020. "Productivity Shocks, Long-Term Contracts and Earnings Dynamics," NBER Working Papers 28060, National Bureau of Economic Research, Inc.
    21. Cynthia L. Doniger, 2021. "The Ways the Cookie Crumbles: Education and the Margins of Cyclical Adjustment in the Labor Market," Finance and Economics Discussion Series 2021-019, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    specific human capital; real wage cyclicality; postgraduates; wage premium; contracts; search;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:98027. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.