June 2003, Vol. 126, No.6
Skill-weighted human capital
The quality market
Précis from past issues
Routine can be viewed as an economic activity in which an individual gives up some variety with regard to timing of actions in return for some gain (either directly from the routine or because the routine is productive). Daniel S. Hamermesh of the University of Texas takes this view in a recent paper and attempts to see how routines vary among people, based on factors such as their educational attainment.
Hamermesh examines his subject in "Routine" (National Bureau of Economic Research Working Paper 9440). The time-use data for his study come from four countries: Australia, the former West Germany, the Netherlands, and the United States. The Australian and German surveys involved much larger samples than the other two, and the time intervals and activities were coded more finely, so his analysis concentrates on those data sets. In addition, the U.S. data, which are from the 1975–76 Time Use Study, are quite old; apparently, these are the only American data available with information on more than one diary day. Because Hamermesh is looking at "temporal routine," which he defines as "doing the same thing in each of at least two time periods at the same time," it’s necessary to have data that cover more than one day.
Hamermesh finds that "men engage in more routine behavior than women, but only because they spend more time in (routine) market work." He also observes that education and income affect routine: "Other things equal, more educated people engage in less routine behavior, while higher household incomes enable people to purchase more temporal variety." One of his most surprising findings is that the "presence of children, even young children, has little effect on temporal variety."
Skill-weighted human capital
Firm-specific human capital is a frequently encountered concept in labor economics, and, according to Edward P. Lazear’s introduction to a recent NBER Working Paper, "Firm-Specific Human Capital: A Skill-Weights Approach," empirical studies often suggest that tenure in a specific firm may be as significant as overall experience in wage equations. Lazear also says, however, that the usual clichéd illustrations of firm-specific capital, such as "knowing who does what at the firm and to whom to go to get things done," don’t seem to approach the obvious importance of what is usually categorized as general human capital—college degrees or other credentials, the general knowledge of one’s industry that one gains at work, and so on.
Lazear explores a somewhat different approach to firm-specific human capital, one that focuses less on the idea that there is some specific set of skills the worker develops on the job that absolutely cannot be transferred to another firm than on the notion that each firm seeks a specific mix of otherwise general skills. In other words, a firm may require a maintenance worker who knows a lot of carpentry and a little plumbing. Neither of these skills is really firm specific, but the process of obtaining the right set of skill weights can yield the findings of many empirical studies. For example, if a firm hires someone who is a pretty good carpenter and a fair plumber, it may very well send the worker to carpentry training, despite the fact that carpentry is a general skill. In wage equations, the more uncommon the skill mix required, the more the firm will pay for it and the higher is the observed tenure coefficient in wage equations. Lazear’s general conclusion is that this skill-weights approach generates the same theoretical implications of the traditional view of firm-specific human capital, but has the additional benefit of being a more realistic story.
The quality market
We wide-eyed visitors to big cities such as New York are always amazed at the variety of goods and services available in a large market. New Yorkers, in turn, are not shy about saying that the city offers not just everything, but the best of everything. Steven Berry and Joel Waldfogel report, in the NBER Working Paper "Product Quality and Market Size," that the impact of market size on quality depends on the way quality is produced. Using restaurants as an example of an industry in which quality is produced by variations in marginal costs—better ingredients, better service, better back-of-the house staff—Berry and Waldfogel show that the primary effect of increasing market size in that case is the proliferation of establishments that encompass all quality levels, as well as some tendency to higher general quality.
In contrast to the preceding case of restaurants, Berry and Waldfogel find that in industries such as newspapers, in which quality is produced by assuming higher fixed costs—a bigger and more qualified permanent staff, better research and reporting facilities, and so forth—bigger markets have relatively little impact on the number of products available, but the quality of the local newspapers increases dramatically.
In their concluding discussion, Berry and Waldfogel make an interesting suggestion about the implications of their descriptive findings on the possible evolution of new media such as the Internet. While the Internet has drastically reduced the costs of distribution and vastly increased the size of the information market, the interaction between the high fixed costs of good-quality information and that large market might mean that the Internet will eventually conform to the metropolitan newspaper model. As Berry and Waldfogel put it, "Yet if fixed costs are determined exogenously by a quality competition process, then the new information and retail economy may remain as concentrated as the old."
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