WAGE REDUCTION, UNEMPLOYMENT AND SPECIFIC HUMAN CAPITAL

This paper re-examines the specific human capital hypothesis concerning short-run employment variation to analyze the circumstances in which wage reductions and/or layoffs will occur. By relaxing the usual assumption of downward wage rigidity, we show that the specificity of training influences the attractiveness of wage reduction compared to job separation. The choice of adjustments is analyzed and implications are drawn concerning the impact of the level of specific skill and of other factors on the choice and on the magnitude of such wage reductions as occur. These implications are tested with data on the Seattle recession of 1970-72.