Technological change is a distinctive characteristic of modern labor markets. New technologies change the demand for different skills in the labor market and thus introduce uncertainty in the wage structure that agents will face in the future. In this way, technological change affects agents decisions about which skills to invest in. In this paper, I study how labor market uncertainty arising from technological change influences the private incentives for specialization. I show that in a world populated by risk-averse agents, technologies that generate a positive covariance of wages across sectors or tasks within sectors will strengthen the incentives for specialization, whereas technological progress that generates a negative covariance of wages will generate strong private incentives for agents to become generalists. Therefore, there is no unique relationship between technological progress and specialization. The nature of the new technologies introduced in the labor market is what matters.
Rosen [
Becker and Murphy [
In this paper I deviate from the previous literature to study how labor market uncertainty changes the private incentives for specialization. My focus is on technological change, which causes the skills demanded in the labor market in the future to become unpredictable. For instance, the introduction of certain technologies could replace some tasks and complement others.2 In that case, agents investing in skills that perform specific tasks face the risk that their qualifications could rapidly become obsolete if new technologies replace those tasks in the future labor market. They can diversify that risk if they invest in a second skill that complements those new technologies. On the contrary, if new technologies substitute or complement all tasks in the same way such possibilities for diversification does not exist. Thus, the nature of technological progress can strongly change the private incentives for specialization.
Therefore, workers who are deciding on which skills to specialize in must consider not only the fixed element embodied in human capital investment (the element highlighted by Rosen [
I show that a technological change that generates a positive covariance of wages in the economy could streng- then the private incentives for specialization even in a world populated by risk-averse individuals. For instance, assume that people expect that new technologies will cause wages in the economy to move together. That could be the case with skill-neutral technological change that increases or decreases the productivity of all workers ac- ross all sectors. In that case, even though agents are risk averse, they have greater private incentives for speciali- zation compared with a scenario without uncertainty. On the contrary, if technological change generates a nega- tive covariance of wages across different sectors or tasks within sectors of the economy, the incentives to be- come a generalist are greater. In this case, agents could be willing to pay the fixed cost of investing in a second skill in order to reduce their risk exposure. The central point is that to understand how an uncertain labor market changes private incentives for specialization, we must understand the nature of the technological change.
The rest of the paper is organized as follows. Section 2 develops the model. Section 3 presents and discusses the main results of the analysis. Finally, Section 4 concludes.
Assume an economy with two activities. Those activities could be considered two sectors of the economy or two tasks within a sector. Each activity requires an investment in a different skill. Denote by
Imagine competitive labor markets under stationary conditions that establish efficiency wage rates in each skill. Let
Agents must invest in human capital to get the necessary skills to work in the labor market. As in Rosen [
Note that the subsequent utilization rate of skills,
were
variable to obtain
where
In order to facilitate the solution to the maximization problem of agents, consider the increasing trans- formation
where
Since
Finally, consider the following assumptions:
Those assumptions are useful because they allow us to focus the analysis on how labor market uncertainty changes the private incentives for specialization. Therefore, I leave aside any differences in the expected return earned in different sectors or in the costs of acquiring different skills. Therefore, my focus is on uncertainty that arises mainly from technological change.
3It could be the case that the agent maximizes her utility by investing
Considering the assumptions described by Equations (7) to (9), the optimization problem faced by an agent that must decide the amount of time allocated to task 1 and 2 is3:
Therefore, the optimization problem that agents must solve consists of allocating their endowment of market time in order to minimize their exposure to risk and the fixed costs of investments in skills. In this sense, this problem is similar to a portfolio problem where agents choose their optimal purchases of securities to choose an optimal combination of risk and return. In this case, because of the assumptions described by Equations (7) to (9), the expected value of both “assets” is the same; thus, risk-averse agents will choose the “portfolio” that minimizes the risk exposure. However, the cost of this type of financial diversification comes from the fact that agents must invest in additional skills and, thus, cannot reap the benefits from the increasing returns derived from specialization highlighted by Rosen [
Notice that we can re-express the optimization problem faced by agents as follow:
where
To characterize the solution of the optimization problem described by (11), I will make three different assump- tions regarding the covariance between wages in sectors/tasks 1 and 2,
Proposition 1 If
Proof. Agents must minimize
from (11) that the strategy that minimizes the risk exposure of agents is
First, notice that in the case of specialization, agents will choose the sector with the lower variance. If the variance of wages is the same in both sectors, agents would be indifferent between them. When agents choose to be generalists (in the sense that they invest in more than one skill), they must pay the cost of investing in both skills, that is,
This reduction in the risk exposure when agents are generalists will be more important when the degree of agents? Risk aversion and/or uncertainty in the economy are greater. If those gains more than offset the extra cost of investing in a second skill, then agents will decide not to specialize.
Proposition 2. If
Proof. We have that
increases the incentives for specialization. □
A positive covariance of wages in sectors 1 and 2 (or tasks 1 and 2 within sectors) is an additional source that increases the risk exposure of agents. Therefore, agents do not reduce their risk exposure by investing in both skills, but they have to pay the fixed costs of those investments. As a result, when technological change generates a strong positive covariance of wages across sectors, agents are more likely to specialize.
Proposition 3. If
Proof. This result can be directly derived from Proposition 2. The fact that
imply that a negative covariance of wages decreases the incentives for specialization. □
Propositions (1) to (3) formalize the following intuitive idea. New technologies change the demand for different skills in the labor market. For instance, computer-related technologies could replace some tasks and complement others. Imagine the case of new softwares that replace the medical checkups performed by physicians type A but complement the medical checkups performed by physicians type B. Agents investing in specific skills type A face the risk that their qualifications can become obsolete when the new softwares are introduced in the labor market. This risk can be diversified if those agents invest in both skills A and B. Therefore, this type of technological progress (the introduction of new medical softwares) increases the incentives for agents to become less specialized compared with a case where, for instance, a new machine replaces or complements all tasks in the same way.
New technologies in the labor market that generate a negative covariance of wages across sectors introduce a possibility of risk diversification. With a negative covariance of wages, agents can diversify risks by investing in a second skill that pays higher (lower) wages in states where the other sector pays lower (higher) wages. This source of risk diversification is not valuable in the case where agents are risk neutral.
From propositions (1) to (3) we conclude that the nature of technological progress is a key to understand how labor market uncertainty affects the private incentives for specialization. Technologies that generate a positive covariance of wages across sectors or tasks within sectors increase the risk exposure of generalist agents. Thus, that type of technological change introduces strong private incentives for specialization. On the contrary, technologies that generate a negative covariance of wages across sectors reduce the risk exposure of agents who become generalists in the labor market. Therefore, those types of technologies discourage agents from specializing in a narrow set of skills.
Technological change is a distinctive characteristic of modern labor markets. New technologies change the demand for different skills. For instance, computer-related technologies could replace some tasks and complement others. As a result, agents investing in skills that can be easily replaced by new technologies face the risk that their qualifications could rapidly become obsolete in the future labor markets. However, agents can diversify that risk by investing in a second skill if that skill complements the new technologies that are being introduced in the labor market. Such possibilities for diversification do not exist if new technologies substitute or comple- ment all tasks in an identical way.
Therefore, technologies that generate a positive covariance of wages across sectors or tasks within sectors will strengthen the incentives for specialization, whereas technological progress that generates a negative covariance of wages will generate strong private incentives for agents to become generalists.
In this paper I have shown that private incentives for specialization not only depend on the fixed cost component of the investment in human capital (Rosen, [
An interesting avenue for future research is to analyze how the conclusions of this paper change when a market of securities is introduced as an alternative source of diversification. Extending the model in this paper in that direction could also allow us to study the link between financial and education markets more deeply. For instance, a reduction in the costs of coordinate different complementary skills in the labor market would provide more incentives for specialization and, thus, would increase demand for securities in the financial market, affecting asset prices.