Uncertainty in labor productivity (ULP) is affected by many factors, such as worker‐employer matching, technology, and macroeconomic conditions. Not surprisingly, ULP varies across firms, industries, and economies. How do variations in ULP affect specific human capital (SHC) investment, wage, and labor turnover? A fixed‐wage model is used to show that the answer depends critically on the initial level of ULP. The model is also used to show that wage and SHC are always positively correlated, but SHC investment and labor turnover do not have a monotonic relationship. These results have implications for empirical studies and public policies affecting ULP.

This article investigates how human capital investment, labor turnover, and wages are jointly determined when the current employer knows more about a worker's productivity than potential employers. Results derived are quite different from, or unexplored by, the standard human capital theory. The authors show that the information asymmetry can cause an externality distortion in human capital investment because higher productivity due to the investment may not be recognized by the market. The investment level increases in the degree of firm specificity of human capital. The underinvestment problem is more severe when human capital is general than when it is firm-specific.

The Myth of the East Asian Miracle: The Macroeconomic Implications of Soft Budgets by Chong-En Bai and Yijiang Wang. Published in volume 89, issue 2, pages 432-437 of American Economic Review, May 1999