Firm-Specific Human Capital: A Skill-Weights Approach

One problem with the theory of firm-specific human capital is that it is difficult to generate convincing examples of investment that could generate the sometimes observed large and continuing effects on earnings. Another approach, called the “skill-weights” view, allows all skills to be general in that there are other firms that use the each of the skills. But firms use them in different combinations and with different weights attached to them. The skill-weights view not only has aesthetic appeal, but is consistent with the frequently observed large tenure effects. All of the implications of the traditional view are produced by this approach, and there are a number of other implications that distinguish the new view from the traditional one. The empirical evidence already contains some support for the skill-weights view.