Academic journal article Economic Inquiry

Firm-Specific Human Capital, Job Matching, and Turnover: Evidence from Major League Baseball, 1900-1992

Academic journal article Economic Inquiry

Firm-Specific Human Capital, Job Matching, and Turnover: Evidence from Major League Baseball, 1900-1992

Article excerpt

JIM WELLER [*]

The two dominant labor market turnover hypotheses, the firm-specific human capital model (FSHCM) and the job-matching model, suggest different patterns of player mobility in major league baseball. The matching hypothesis predicts greater mobility of players in positions that require substantial team production. A better match may offer large productivity gains. Alternately, the FSHCM predicts players in positions requiring the greatest amount of teamwork will benefit from specific knowledge, making them less likely to change teams. We examine the frequency distribution of trades by player position from 1900-1992 and find the FSHCM provides the best explanation for turnover in this industry. (JEL J63, L83)

I. INTRODUCTION

Recent explanations of labor market turnover usually adopt one of two competing hypotheses, namely, the firm-specific human capital model (FSHCM) and the job-matching model. Accumulated firm-specific capital reduces the likelihood of employee turnover because other firms' offers cannot surpass a worker's current wage, which, at least in part, represents payment for productivity based on knowledge other firms find useless. This effect of firm-specific assets on turnover is well established, beginning with the seminal work of Becker (1964). An empirical regularity implied by the FSHCM is that workers' wages will rise with tenure because businesses will increase compensation to employees as their firm-specific assets accumulate over time. Alternatively, the job-matching hypothesis, exemplified by Jovanovic (1979), implies that, if a worker and employer are poorly matched, then both parties increase search activity, reducing the length of the match. Both models predict a positive relationship between tenure and pay, however, they hypothesize opposite directions of causation. A long tenure in the job-matching model is the result of a person remaining in a job for which he or she is particularly well suited, whereas in the FSHCM high productivity in the current job is the result of a long tenure.

To date, empirical studies have attempted to discriminate between the competing hypotheses by trying to establish the size and nature of the tenure effect on the wage in the current job. Results and conclusions have been mixed. Abraham and Farber (1987), Altonji and Shakotko (1987), and Marshall and Zarkin (1987) cast doubt on the notion that workers receive significant returns for their firm-specific investments, and each instead tended to reach conclusions that were supportive of the job-matching hypothesis. [1] More recent work by Brown (1989) and Topel (1991) have reached different conclusions, more supportive of the FSHCM; for example, they find that returns to tenure comprise 20% (Brown) to 25% (Topel) of wage growth within a particular job. A significant empirical problem in testing these theories is that the results are particularly sensitive to model specification. [2] Also, the available microdata is based only on workers' responses and ignores firm information that may be essential to measure firm -specific assets. We propose an alternative approach to distinguish between the two theories. Instead of analyzing the earnings-tenure link, we measure relative turnover rates based on a worker's position within a team setting--using data from major league baseball (MLB). We believe that the two turnover hypotheses have quite different implications with respect to the trading patterns by player position. [3] The matching hypothesis predicts turnover will be more pronounced in positions with greater emphasis on team production, simply because the potential productivity gains from a good match are greatest in these positions. Alternately, the FSHCM predicts that the performance of players in positions requiring the greatest amount of teamwork will benefit from specific knowledge, making them less likely to change teams. By examining the frequency distribution of trades by player position in MLB from 1900-1992 we demonstrate that the FSHCM provides the best explanation for turnover in this "industry" and that th e job-matching motivation is not very evident. …

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