Uncertainty in Labor Productivity and Specific Human Capital Investment

Abstract

The degree of uncertainty in a worker's productivity is affected by many factors, such as worker-employer matching, technology, and macroeconomic conditions. Not surprisingly, uncertainty in labor productivity (ULP) varies across firms, industries, and economies. The question arises: How do variations in ULP affect specific human capital (SHC) investment, wage, and labor turnover? We use a model of fixed wage contracts to show that greater ULP can lead to either a higher or lower SHC investment, wage offer, and probability of separation, depending on the initial level of ULP. Wage and SHC are always positively correlated, but SHC investment and labor turnover do not have a monotonic relationship. These results have implications for empirical studies and public policies affecting ULP.

Keywords: Uncertainty, Specific Human Capital, Wage, Turnover

JEL Classification: J24, J41