On-the-Job Search , Human Capital Accumulation and Endogenous Firm Productivity

This paper studies the implications of human capital accumulation for firms’ decisions to invest in match-specific productivity. This brings a novel insight into the relationship between human capital accumulation and the equilibrium wage distribution. The paper extends a wageposting model of on-the-job search with learning-by-doing (Burdett et al., 2011) by introducing an investment choice in the firms’ problem. Since high-paying firms see their workers quit less often and attract more experienced workforce in equilibrium, they invest more in productive capacity; as they are more productive, they pay higher wages. This links the rate of human capital accumulation to the equilibrium distribution of firm productivities and wages. The model is solved numerically and it is shown that high rates of accumulation imply more disperse and positively skewed offer distributions, and have a quantitatively large effect. ∗I am grateful for the advice and support of Carlos Carrillo-Tudela and Melvyn Coles. The financial support from the Economics and Social Research Council (ESRC) is appreciated.