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Are Specific Skills an Obstacle to Labour Market Adjustment? Theory and an Application to the EU Enlargement

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  • Lamo, Ana
  • Messina, Julián
  • Wasmer, Etienne

Abstract

Countries react differently to large labour reallocation shocks. Some minimize the costs by adapting rapidly, while others suffer long periods of costly adjustment, typically high and persistent unemployment and temporary output losses. We argue that the existence of large amounts of specific human capital slows down the transitions and makes them costly. We illustrate this point by building a theoretical framework in which young agents' careers are heavily determined by the type of initial education, and analyze the transition to a new steady-state after a sectoral demand shift. In the absence of mobility, it can take as much as a generation for the economy to absorb the shock. An interesting case study is the European Union enlargement, which led to a modernization of many sectors in Eastern countries and to a fast decline of traditional industries and agriculture. Using labour force data from a large economy with rigid labour markets, Poland, and a small open economy with increased flexibility, Estonia, we document our main claim, namely that specialized education reduces workers' mobility and hence their ability to cope with economic changes. We find that holding a vocational degree is associated with much longer unemployment duration spells, relatively large wage penalties when changing jobs and higher likelihood of leaving activity for elder workers. Quantitative exercises suggest that the over-specialization of the labour force in Poland led to much higher and persistent unemployment compared to Estonia during the period of EU enlargement. Traditional labour market institutions (wage rigidity and employment protection) increased, but to a much lesser extent, the unemployment gap.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5503.

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Date of creation: Feb 2006
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Handle: RePEc:cpr:ceprdp:5503

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Keywords: enlargement; labour reallocation; matching; specific skills; unemployment; vocational education;

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References

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Citations

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Cited by:
  1. Lamo, Ana & Messina, Julián, 2010. "Formal education, mismatch and wages after transition: Assessing the impact of unobserved heterogeneity using matching estimators," Working Paper Series, European Central Bank 1215, European Central Bank.
  2. Lamo, Ana & Messina, Julián & Wasmer, Etienne, 2011. "Are specific skills an obstacle to labor market adjustment?," Labour Economics, Elsevier, vol. 18(2), pages 240-256, April.
  3. Ohlsson, Henry & Storrie, Donald, 2007. "Long term effects of public policy for displaced workers in Sweden – shipyard workers in the West and miners in the North," Working Paper Series, Uppsala University, Department of Economics 2007:19, Uppsala University, Department of Economics.
  4. Etienne Wasmer, 2006. "General versus Specific Skills in Labor Markets with Search Frictions and Firing Costs," American Economic Review, American Economic Association, vol. 96(3), pages 811-831, June.
  5. Jakob von Weizsäcker & Etienne Wasmer, 2007. "A better Globalisation Fund," Policy Briefs 36, Bruegel.
  6. Alain Delacroix & Etienne Wasmer, 2007. "Job and Workers Flows in Europe and the US: Specific Skills or Employment Protection?," Sciences Po publications info:hdl:2441/9938, Sciences Po.
  7. Thirunaukarasu Subramaniam & Ahmad Zubaidi Baharumshah, 2011. "Unemployment And Speed Of Adjustment In Asean-3 Economies: A Cointegration Analysis," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 56(03), pages 327-347.
  8. Bert Minne & Marc van der Steeg & Dinand Webbink, 2008. "Skill gaps in the EU: role for education and training policies," CPB Document, CPB Netherlands Bureau for Economic Policy Analysis 162, CPB Netherlands Bureau for Economic Policy Analysis.
  9. Alexandre Janiak, 2008. "Mobility in Europe - Why it is low, the bottlenecks, and the policy solutions," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 340, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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