Interpreting Europe and US labor markets differences : the specificity of human capital investments

We show a fundamental property of human capital investments : they are not independent of the aggregate state of labor markets. In particular, frictions and slackness of the labor market raise the returns to specific human capital investments relative to general investments. This is a property that Becker’s seminal contribution in the context of perfect labor markets did not consider. We then build a macroeconomic model where in equilibrium emerge different regimes. In the G-regime, workers invest in general skills. This occurs when they face high turnover labor markets and in the absence of employment protection. The S-regime in which workers invest in skills specific to their job appears when employment protection is high enough. Low job turnover is both a cause and a consequence of specific investments in human capital. This paper then re-interprets Europe-US differences in arguing that the US are closer to the G-regime and Continental Europe to the S-regime. This conjecture provides, among other things, a rationale for differences in labor mobility and reallocation costs, which are typically ignored in American ’International Trade’ textbooks while considered as extremely large in the public debate in Europe. In a S-regime, mobility costs are high and transitions between steady-states have especially strong adverse effects. On the other hand, in the steady-state, workers in the S-regimes are very productive. Each regime has thus its own coherence, although the European type incurs higher transition costs when macroeconomic conditions change.