Why Didn’t the College Premium Rise Everywhere? Employment Protection and On-the-Job Investment in Skills
American Economic Journal: Macroeconomics (Forthcoming)
Why has the college wage premium risen rapidly in the United States since the
1980s, but not in European economies such as Germany? We argue that differences
in employment protection can account for much of the gap. We develop a model in
which firms and workers make relationship-specific investments in skill accumulation.
The incentive to invest is stronger when employment protection creates an expectation
of long-lasting matches. We argue that changes in the economic environment have
reduced relationship-specific investment for less-educated workers in the United
States, but not for better-protected workers in Germany.