ARE SPECIFIC SKILLS AN OBSTACLE TO LABOR MARKET ADJUSTMENT?

Ana Lamo

We argue that the existence of large amounts of specific human capital makes costly and slows down the adjustment in the labor market after large reallocation shocks. To illustrate this point we build a theoretical framework in which young agents' career is heavily determined by initial education, and analyze the transition to a new steady-state after a sectoral demand shift. An interesting case study is the EU enlargement, which led to modernization of many sectors in eastern countries and to a fast decline of traditional industries. Using labor force data from a large economy with rigid labor markets, Poland, and a small open economy with increased flexibility, Estonia, we document and find support for our claim. Quantitative exercises suggest that the overspecialization of the labor force in Poland explains to a large extent the much higher and persistent unemployment compared to Estonia during the period of EU enlargement.