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

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  • 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.

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  • 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
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    References listed on IDEAS

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    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

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