Human Capital Creates Insider Power

23 Pages Posted: 9 Nov 2003

See all articles by Thomas Zwick

Thomas Zwick

University of Würzburg - Business Administration & Economics; Centre for European Economic Research (ZEW); Maastricht University - Research Centre for Education and the Labour Market (ROA)

Joan Muysken

University of Maastricht

Date Written: June 1999

Abstract

This paper demonstrates that insiders can erect barriers to entry and skim rents by sinking costs in human capital when labour markets are otherwise perfectly contestable. The sunk costs nature of human capital investments may result from the need to satisfy ever increasing specialised skill requirements in our society. When outsiders can not threat with market entry, insiders invest inefficiently in human capital such that their rent share is maximized. This inefficiency results from the hold-up problem that arises since workers are not residual claimants of the human capital rents. On the other hand, since insiders´ investments are negatively correlated with the number of workers, this may lead to higher than efficient investments nevertheless. When outsiders have an effective entry threat, insiders are forced to accept higher employment of outsiders and share the reduced rents with them. However, full employment is not necessarily reached and in any case investments are higher and social rent is lower than optimal.

Keywords: Insider-Outsider, Human Capital, Rents, Unemployment, Hold-Up

JEL Classification: J24, J41

Suggested Citation

Zwick, Thomas and Muysken, Joan, Human Capital Creates Insider Power (June 1999). ZEW Discussion Paper No. 99-25. Available at SSRN: https://ssrn.com/abstract=376045 or http://dx.doi.org/10.2139/ssrn.376045

Thomas Zwick (Contact Author)

University of Würzburg - Business Administration & Economics ( email )

Sanderring 2
Wuerzburg, D-97070
Germany

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

Maastricht University - Research Centre for Education and the Labour Market (ROA) ( email )

P.O. Box 616
Maastricht, MD6200
Netherlands

Joan Muysken

University of Maastricht ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

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