Pak-Wai Liu

Human Capital and Inequality in Singapore

Development economists have long been concerned with the relationship between income growth and income distribution. Kuznets and Adelman and Morris among others have suggested various hypotheses to account for an observed regularity: the U hypothesis.l This empirical observation found in countries which have undergone economic development is quite common. Income distribution becomes at first more unequal, and only in the later stages does it become more equal. In recent years we have also seen the rapid development of human capital theory and its successful application to various social and economic behavior. One of the most actively researched areas is the personal distribution of income. There are several recent attempts to apply the human capital approach to developing economies using the Mincer model.2 Skeptics can object to the serious discrepancies between the assumptions of the theoretical model and the reality in developing countries. The derivation of the Mincer earnings function proceeds from the assumption of equalizing differentials within the labor market, which is a questionable assumption for developing coun-

Efficiency and sharing of investment in specific human capital under risk aversion

Abstract This paper analyses the investment behavior of a risk-averse worker who searches for other jobs in a two-period model. It will be shown that given an appropriate investment technology, the worker will invest in specific human capital efficiently if his investment costs and return can be shared with some parties. The presence of sharing allows the worker to invest efficiently without being affected by his risk aversion since he can adjust his share of the investment in a way compatible with his attitude towards risk.

Wage structure when wage offers are private

Abstract In this paper we analyse the structure of wages of workers in contract firms for a two-period economy in which there is interfirm mobility. A contract firm provides specific training for a worker during the first period, which increases his productivity if he stays in the second period, but the worker may quit to join an alternative firm after a successful search. When the worker cannot borrow in capital markets, the motive for consumption smoothing dominates and the contract firm acts as a banker and sets wage above marginal product in the first period and below it in the second. When the worker can borrow, insurance is the dominant concern and the contract firm acts instead as an insurer by setting the first-period wage below marginal product and the second-period wage above it. This dichotomy will fade away if the contract includes an exit fee as a quit penalty.

Quits, layoffs and contracts on sharing investments in specific human capital

Abstract When the worker is risk averse and has no access to capital markets then the sharing of specific human capital investments with the firm is complicated by considerations for consumption smoothing and productive efficiency. Sharing is no longer solely determined by the fact that one party can inflict a capital loss on the other unilaterally separating. Using a contract framework this paper shows that restricting the right to separate to either the worker or the firm does not necessarily result in that party taking full responsibility of the investments. Whether no sharing remains optimal in such cases will depend on the relative magnitude of the workers subjective discount rate and the market discount rate for investments.

Incentives and disutility of effort in a linear piece-rated employment contract

Abstract Previous studies on contracts which involve incentives and risk sharing seldom give explicit treatment of the impact of the agents disutility of effort on the incentive properties of the contract. It is shown that in a linear piece-rated employment contract which pays workers according to both the time worked and output, an increase in the piece rate does not necessarily induces more effort, as generally taken for granted. The incentive effect of the piece rate in fact depends on the extent to which the worker dislikes effort.

Monitoring cost, disutility of effort and the forcing employment contract

Abstract If the state of nature is not observable, ex post, but work effort is, contracts between the risk neutral firm and the risk averse workers will stipulate the level of effort which will be monitored to ensure its delivery. In this paper it will be shown that when effort is stipulated and monitored, workers will be paid solely by a fixed wage payment independent of output. The size of the wage payment will depend on the level of effort stipulated, the marginal rate of substitution of effort for income and the cost of monitoring, provided that the cost is not prohibitively high.

Verifiable wage offers and recontracting: effect on wage and consumption profiles

Abstract This paper analyzes the effect of recontracting and matching verifiable wage offers on the intertemporal structure of contract wage and consumption profile for a two-period economy. A contract firm provides specific training for a worker during the first period, which increases his productivity if he stays in the second period, but the worker may quit to accept an alternative wage offer after a successful search. Wage offers are private to the worker but can be presented to the contract firm for matching. This paper shows that when capital markets are imperfect and wage offers are verifiable, the contract firm recontracts and matches any wage offers the worker receives up to the second-period productivity. The ex ante contract wage profile will be flat. Inefficient quits will be eliminated and there will be complete ex ante consumption smoothing. It is significant to note that the result of rising wage profile derived in numerous contract models is fragile with respect to assumptions on mechanism of interfirm labor mobility.