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Atlanta Fed Working Papers


Sector-Specific Human Capital and the Distribution of Earnings

Eric Smith
Working Paper 2009-21
September 2009

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This paper incorporates assignment frictions and sector-specific training into the Roy model of occupational choice. Assignment frictions represent the extent of the market whereas differences in sector-specific training reflect worker specialization. This framework thus captures Adam Smith's idea that the extent of the market determines the division of labor. The paper demonstrates the way in which the relationship between assignment frictions and specialization affects the level and composition of human capital acquisition, aggregate output, and the distribution of income. Not surprisingly, economywide training, output, and specialization increase as the extent of the market increases. The distribution of these gains, however, is uneven. Within group or residual income, distribution does not converge monotonically as search frictions diminish. Comparisons across groups reveal that these effects can become more pronounced as average income increases.

JEL classification: E24, J24, D31

Key words: human capital, occupational choice, job assignment, income distribution


The author thanks Ken Burdett, Boyan Jovanovic, Philipp Kircher, and Michael Sattinger as well as seminar participants at the University of Pennsylvania, SUNY-Albany, and the Federal Reserve Bank of Atlanta for helpful comments. The views expressed here are the author's and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.

Please address questions regarding content to Eric Smith, Research Department, Federal Reserve Bank of Atlanta and Department of Economics, University of Essex, Wivenhoe Park, Colchester, Essex CO4 3SQ, United Kingdom, 44 1206 872756, esmith@essex.ac.uk.

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