Labor Characteristics and the Return to General and Specific Skills

The human-capital approach argues that workers get the full return to general skills while firms retain most of the return to firm-specific skills. This paper presents long-run competitive analysis using K. J. Lancaster's "new approach to consumer theory" to show that workers receive the marginal productivity of their characteristics such as aptitudes, schooling, etc., while the firm receives the return to its provision of the general and firm-specific environments. Workers will not get the full return to their general skills nor can the firm retain the full, perhaps not even most, of the return to firm-specific skills.