Human capital specificity in Canada: Evidence and implications for policy

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Résumé (français)

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Résumé (anglais)

Increased mobility of workers across industries, occupations and firms, has implications for the labour market. Skill (or occupation) specific human capital can be used by a worker in all firms and industries. However, this is not the case for firm or industry specific human capital. This paper presents empirical analysis on human capital specificity in Canada, using data from the 1986 Survey of Displaced Workers and the Survey of Labour and Income Dynamics. The Canadian data suggest a major role for skill (occupation) specific human capital, a modest role for firm specific human capital, largely confined to the first year of employment with a firm, and a possibly negligible role for industry specific human capital. Comparisons with the United States suggest a similar ranking of the different types of human capital in the United States. In addition, data show no evidence that the returns to specific human capital investments in the two countries are significantly different. The evidence against industry specific human capital playing a significant role in the Canadian economy has important policy implications. An efficiently functioning labour market is continuously reallocating labour across industries in response to changing demands for different industry outputs. To the extent that only a negligible amount of human capital is industry specific, these re-allocations could take place without any major destruction of human capital, and therefore without serious negative wage consequences for the average worker, provided his basic skills are unchanged. This result could also be extended to re-allocations across narrowly defined occupations. While for the average worker the wage consequences of involuntarily moving industry may be small, the effect for a minority of individuals could be more substantial. A more disaggregated analysis would be necessary to identify such minorities.