Human capital and market size

Abstract

This paper studies how the size of the labour market affects workers' decisions to invest in human capital. We consider a model of mismatch where firms rank workers according to their level of skills. The matching process operating in the market has the property that the job finding probability of workers depends on market size, market tightness and their ranking. The model is consistent with several facts highlighted in empirical studies: in bigger markets the distribution of human capital is more unequal and the returns to skill are higher.