How to Finance Education when the Labor Force is Heterogeneous?

Abstract

One of the key-problems in modern economies is the splitting of the cost of education between workers, firms and the government. Ever since the pioneering work of Becker (1964), the demand for education is analyzed with investment models. The concept of human capital appears to be central for the study of several phenomena. In particular, Becker (1964) introduces a fundamental distinction between general human capital and specific human capital. The former refers to a general level of ability which has value to all firms in the economy. The latter refers to specific abilities which have values to only one firm. It is part of the conventional wisdom that the cost of general training is to be borne by workers only, whereas the cost of specific training is to be shared by firms and workers because both parties can share the corresponding returns (Hashimoto (1981) and Parsons (1986)). The potential mobility of workers across firms would then determine the way the cost and the return of education are shared.

We thank Paul David, Jonathan Hamilton, Margaret Stevens, Xavier Wauthy and Stefano Zamagni for their useful comments. Financial help from the European Union “Human Capital and Mobility” program is gratefully acknowledged by the second author. Both authors also thank the PIRVILLE (CNRS) for its financial support.