Labor Market Integration, Investment in Risky Human

Capital, and Fiscal Competition



David E. Wildasin
Department of  Economics
Vanderbilt University


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 /