Labor Market Integration, Investment in Risky Human
Capital, and Fiscal Competition
by
David E. Wildasin
Department of Economics
Vanderbilt University
Abstract
This paper presents a general-equilibrium model of human capital investment
in which skill acquisition entails increased specialization and exposes
skilled workers to region-specific earnings risk. A "common labor
market" allowing interjurisdictional mobility of skill labor mitigates
these risks; state-contingent spatial reallocations of skilled labor also
improve efficiency. If capital markets allow private financing of human
capital investment, labor market integration raises welfare and reduces
ex post earnings inequality. If instead human capital investment can only
be financed through local taxes, labor market integration leads to interjurisdictional
fiscal competition that shifts the burden of taxation to low-skilled immobile
workers. Decentralized public provision of human capital investment creates
earnings inequalities and is inefficient.
David E. Wildasin / dew@davidwildasin.us
