Human Capital in the 21st Century: A Macroeconomic Perspective with a Special Reference to the Multidimensionality of Skills

• Applicant: Dr. Damir Stijepic
• Subject Area: Economic Theory ; Statistics and Econometrics
• Term: from 2019 to 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 433336278

At least since the human-investment revolution in economic thought in the 1960s, human capital is regarded as a key factor in production. Most activities in modern knowledge economies require a certain set of skills, so that the acquisition of the relevant skills tends to be a prerequisite for a successful participation in the labor market. All in all, a complete picture of the role of human capital is crucial for a comprehensive account of the modern economic system.The proposed research project provides a new perspective on the role of human capital in the macroeconomic processes. The standard macroeconomic models stress the role of human capital in raising the productivity of a person at specific tasks in the production process of a firm. Beyond this productivity effect at a firm, investments in human capital may be additionally valuable in the sense that suitable investments enhance the ability of a person to take advantage of potentially arising job opportunities. The idea is that it is not sufficient to be productive at a given task. It is also important to raise the chances of holding a suitable job at the right firm. In particular, the literature on factor allocation efficiency emphasizes that, in an economy with heterogeneous firms, aggregate total factor productivity depends not only on the total factor productivities of the individual firms but also on how inputs are allocated across firms, i.e., aggregate total factor productivity can be low because of misallocation. In an economy with heterogeneous jobs and workers, mismatch, i.e., workers holding jobs that are not the best fit for their skills, may lower the output below its potential as highlighted by assignment and matching models.The allocation approach to human capital of this research project readily addresses key labor market phenomena about which the usual production-function paradigm is mostly silent. Notably, if the market frictions and the potential efficiency gains are sufficiently high, a person may find it optimal to acquire skills that are not complementary in production at a given firm in order to be able to take advantage of potentially arising opportunities. Recent trends suggest that the allocation channel of human capital is gaining in importance relative to the production-function channel.The main objective of this research project is to develop a new macroeconomic model that explicitly incorporates the allocation channel of human capital. I also plan to gather supporting empirical evidence and to quantify the allocation channel of human capital, with a particular emphasis on international comparisons.

• DFG Programme: Research Grants