Learning, Wage Dynamics, and Firm-Specific Human Capital

Abstract

We introduce a dynamic and fully strategic model of wage determination in the presence of firm-specific human capital. In this model, human capital is interpreted as information. We show that equilibrium exists and is efficient and that it gives rise to a unique distribution of the social surplus. We show further that the equilibrium wage is determined by three factors. Consideration of these factors allows us to determine when and how the market mechanism enables the worker to capture some of the returns to firm-specific human capital. We relate our findings to the ongoing empirical debate concerning the return to tenure.

JEL Classification: J31, J41