Human capital investment, and the inefficiency of compensation based on marginal productivity: the static case
AbstractA simple extension of the traditional analysis of human capital accumulation is considered in a general equilibrium context. When real wages are equated to marginal products in the presence of human capital investment, resulting equilibria are almost never efficient even by very weak criteria. This is true even though labor is not a quasi-fixed factor, and informational asymmetries are excluded from the model. It is shown that human capital investment generates externalities, and has associated with it a “free-rider problem.” This, in turn, explains the common practice of employers requiring minimum levels of human capital accumulation for some employees, and refusing to hire “overqualified” workers for other positions.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 205.
Date of creation: 1982
Date of revision:
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