Lecture 1:Human Capital Theory. September 27, 2017 Hideo Owan Institute of Social Science

Transcription

1 Lecture 1:Human Capital Theory September 27, 2017 Hideo Owan Institute of Social Science

2 What is Organizational/Personnel Economics? 1. Key Component 1: Human Capital Theory + Heterogeneous skills/tasks Job assignment model (model of promotion) + Competitive market assumptions / + Nash Bargaining Solution Wage + Uncertainty Mobility 2. Key Component 2: Agency Theory / Contract Theory + verifiability, Measurement/ subjective evaluation + multi tasking settings multitasking agency problem + commitment problems and bounded rationality authority and leadership + repeated interactions employment relationship/wage dynamics/teams 3. Useful concepts and models Transaction cost economics (TCE) Theory of complementarity (supermodularity) Property rights approach Team theory (models of information processing) Knowledge based hierarchy (Garicano s model)

3 What is Organizational/Personnel Economics? 4. Issues requiring several models Job design human capital model, team theory, contract theory Boundaries of the firm TCE, property rights approach, market equilibrium models. Innovation contract theory, network (knowledge spillovers), behavioral approach Hiring contract theory, matching, network (reference) Organizational design, etc. Gender inequality issues 5. Empirical Studies: need to deal with internal labor markets Employer employee matched data Insider econometrics Qualitative research and case studies (clinical studies)

4 Human Capital Investment: Schooling Can we treat investment in skills and knowledge in the same way as that in physical assets like machine? What are the key differences between machine and human capital? A firm cannot claim the ownership of human capital. Workers can freely switch firms. Consider formal schooling one of the important forms of human capital investment. Year T If work, earn ($) J 0 J 1 J 2 J T If get HE, earn ($) -C K 1 K 2 K T Return K 1 -J 1 K 2 -J 2 K T -J T Cost C+ J 0

5 When should an individual get education? The cost of investment is borne now while the returns accrue over a period of time into the future. Needs to compare NPV of future returns with the current costs. t Go to the graduate program if C J t 0 t. t 1 (1 r) Using this inequality, we can answer Why do fewer people receive higher education? Why is an economic recession good for graduate programs? Why do only young people go to school? Why do fewer women go to graduate school? T K J

6 Human Capital Investment: On The Two types of human capital Job Training (OJT) General human capital (GHC): knowledge, skills and attitude that raise the productivity of the worker irrespective of the firm which employs the worker. Schooling provide GHC. Firm specific human capital (FSHC): knowledge and skills that are effective only at the firm where the worker currently works. Sources of firm specificity Firm specific technology (could be tacit rather than formal) Firm specific practices: firms may have unique ordering, billing, quality control and HR practices. Relation specific knowledge: Many employees have very useful information about their customers and their colleagues. Corporate Culture, Norm and Trust

7 Becker (1962): Who pays for OJT? Timeline 1. t =0 Firm offers a contract (w 1, ) to a worker where w 1 is the first period wage and is the provision of training. 2. t =1. Training and production (human capital investments sunk). Workers produce output y and receive training τ at cost c(τ). 3. t =1.5. Workers face option to leave the firm. Wage is negotiated. 4. t =2. Production takes place again. Worker produces output y+ f(τ) at any firm (general training) and receives w 2. Key Assumptions: 0 " 0, , " 0, lim. First period wage and the provision of OJT (w 1, ) are contractible. Employment contract can be terminated by either side at will. No market friction. Labor market is perfectly competitive.

8 Case of General Training Solve by Backward induction. Under perfect competition, w 2 = y+ f(τ). Both the worker productivity and their outside option value (market value) increase by the same amount. It is the worker who gets to keep the returns. Let * be the efficient level of training. i.e * maximizes. Firm solves max y c( ) w (1) w, 1 s.t. w w w y f( ) u In equilibrium, the solution also has to satisfy the zero profit condition in the competitive labor market. y c w 0 (2) (1) and (2) lead to (y c(τ*), *). The optimal contract should specify that the firm provides the efficient training and the worker pays for the cost!

9 Wage Profile with General OJT Productivity with OJT = Outside option value = Wage Return employees receive Productivity without OJT Employees pay for the cost

10 Case of Firm Specific Training w 2 Let be the outside option value for the worker in the second period. Then, w y 2 The market value does not increase by the training. Assume Nash bargaining solution. w 2 = y + /2 Now, which side should pay the cost of training? Neither party is willing to cover the full cost if /2 c(τ*) < 0. In a competitive labor market, the firm solves f () max2 y c() f() w1 w2 y c() w1 w1, 2 f () s.t. w1 w2 w1+y+ u 2 The solution of this maximization problem ensures the efficient training τ*. In addition, the zero profit condition holds. w = y c(τ*) + f τ /2

11 Who pays the cost of training When the labor market is competitive. Period 1 Period 2 Worker Wage y c(τ*) + /2 y+ /2 Firm Profit /2 /2 When the firm has monopsony power. Period 1 Period 2 Worker Wage y /2 y+ /2 Firm Profit /2 c(τ*) /2 Note that the cost of training is shared when c(τ*) + /2 < 0. If either side pays the full cost, efficient training will not be provided. Key result: sharing both the costs and benefits gives both sides incentives to (1) make the investment; (2) maintain the employment relationship to recoup the benefits.

12 Wage Profile with Firm Specific OJT Productivity with OJT Employees pay a part of the cost The firm pays a part of the cost The return the firm receives Wage The return the employees receive Productivity without OJT =out side option value

13 Problem with Becker Model Becker Model implies that workers should pay for the cost of general training. But, in practice, firms pay a significant portion of the cost. Harhoff and Kane (1993): German apprenticeships Loewenstein and Spletzer (1998): US employers bear substantial portion of firm sponsored general training. Autor (2001): up front cost borne by temporary staffing agencies. Plausible explanation by labor market friction and credit constraint.

14 Acemoglu and Pischke (1999) Let s change assumptions Provision of OJT is not contractible. Only wages are contractible but no long term contract is available (same as Becker s model). w 2 < y+ f(τ) due to market frictions. In this case, is socially optimal training provided? Assume ( ) y f( ) w ( ) 0 '( ) 0 w ( ) 2 2 and where is the market wage. No exogenous turnover. All workers remain with the firm in period 2 as long as they receive w ( ) 2. All bargaining power rests with the firm that is, firm is the full residual claimant of any surplus y f( ) w2 ( ) c( ). w1 y (training not contractible, workers are credit constrained).

15 Firm s problem Firm solves max y c( ) w y f( ) w ( ) ( ) c( ) 1 2 The optimal is inefficient (i.e. < ) because f '( ) c'( ) w2 '( ) 0. No training is provided if ( ) is constant with (the same as Becker s model). Efficiency is achieved if is contractible or long term contracting is available. This is something of a paradox: more inefficient market structure greater wedge between productivity and wages encourages greater firm training.

16 Examples of market friction Search friction worker will not look for a job if the expected gain is larger than the search cost. Asymmetric information about worker productivity winner s curse create a wedge. Efficiency wage same as offering a long term contract. Minimum wage when the minimum wage is binding and employing a worker is still profitable, '( ) f '( ). training is efficient. Complementarity between general and firm specific human capital firm specific human capital create a wage ( ). Complementarity is necessary to induce '( ) 0. Centralized bargaining

17 Grout (1984) Nash bargaining: a fraction of the surplus [0,1] goes to the worker. Each demands at least its threat point, which is w 2 for the worker and zero for firms. The maximization problem is now max y c( ) w (1 )[ y f( ) w ( )] 1 2 (1 )[ f '( ) w '( )] c( ) 2 The worker s total wage set by w( ) y w ( ) [ y f( ) w ( )]. and profits ( ) (1 )[ y f( ) w2 ( )] c( ). Are workers necessarily better off with large? 2 2 Note that is decreasing in. 1 In the extreme case when = 1, = 0 (i.e. no training occurs). Then it is possible that, for some, y w (0) [ y f(0) w (0)] 2 y f(0) y w ( ) [ y f( ) w ( )]

18 Theorem (Grout 1984) d ( ) dw( ) d d Proof: ( ) w( ) 2 y f( ) c( ) d ( ) dw ( ) [ f '( ) c'( )] d 0 d d d Paradox: raising ex post bargaining power could hinder ex ante efficient resource allocation. Explains why training is not offered much in the presence of militant labor union. Similar story can be found in Freeman and Lazear ( Economic Analysis of Work Councils 1995) Increase in the workers bargaining power reduces the decision rights delegated to the workers workers are under empowered.

19 Summary The discussion of training in Grout (1984) gives rise to three perverse comparative statics. Training is increasing in: the degree of distortion in the wage structure: the greater is '( ), the more training firms provide. the bargaining power that rests with the firm: the smaller is (worker s bargaining power), the more training. the worker retention rate: the lower is worker mobility, the more training will be provided. They all implies the tradeoff between ex ante investment efficiency and ex post allocative efficiency.

20 Comparison of the Three Models is contractable (No market friction) is NOT contractable There is market friction. Firm has 100% bargaining power Provision of training is efficient. Inefficient but some training can be provided. (Acemoglu and Pischke) * is increasing in the distortion in the wage structure. Worker has some bargaining power Provision of training is efficient. (Becker s model) Inefficient but some training can be provided. (Grout s model) * is decreasing in the worker s bargaining power.

21 Hashimoto (1981) Assume both general human capital (g) and firm specific human capital (s) determine productivity (y) and outside market opportunities (w). There are two types of uncertainty Productivity uncertainty ( ): demand shocks, technological shocks. y f( g, s) Shocks to outside opportunities: idiosyncratic wage offers (match quality), life events, job opportunities for spouse. w v( g) Assume and are independent. What is the optimal sharing rule? w [ f( g, s) v( g)] v( g)

22 Nature of uncertainty determines the optimal sharing rule Firm will not fire a worker if y w f( g, s) [ f( g, s) v( g)] v( g) 0 (1 )[ f( g, s) v( g)] Worker will not quit if w w [ f( g, s) v( g)] v( g) v( g) 0 [ f( g, s) v( g)] The employment relationship will continue with the probability [(1 )( f( g, s) v( g))] [ ( f( g, s) v( g))] where and are CDFs of and, respectively. The firm and the worker calculate the expected gains from entering the employment relationship and bargain over. The bargaining may involve the sharing of the training cost, too.

23 Hold up problem with firm specific human capital Existence of quasi rent encourages opportunistic behavior (asset specificity). Two sided hold up problem in the face of an incomplete contract: Worker promises to invest in exchange for higher wage but may not honor his promise to save the cost of investment. Human capital investment is observable but not verifiable. In Becker model, investment was contractible. Firm promises to pay higher wage in exchange for worker investment but may betray to save the wage cost. Need commitment mechanism. Underinvestment problem: recognizing this, the worker has an incentive not to obtain these skills in the first place.

24 Criticism against the literature Firm specific human capital is small. Industry specific human capital plays an important role (Neal 1995 and Parent 2000). Returns to occupation specific human capital are largest (Kambourov and Manovskii 2009) But does it make any difference to the theory? Let h be the industry specific or occupation specific human capital. You have probability that you need to switch industry or occupation in the next period. Then, your wage in the next period is w=y+(1 )f(h)/2 according to Becker s model. Redefine ḟ(s)= (1 )f(h). Every discussion remains the same.