Specific Skilled Labor and the Demand for Social Insurance

Abstract

The relationship between specific skills and the welfare state is contested. To help resolve the conflict, we present a general model of preferences over social insurance with endogenous wages and investment in specific skills and a variety of exogenous constraints. Our dynamic model underscores the link between wages, skills and unemployment risks. It shows that skill-specificity will not affect preferences for insurance when wages adjust for investment costs and unemployment risks. We validate this part of the model with U.S. data. We then extend the model to show how different conditions, including centralized wage bargaining, capital market imperfections and taxation, affect skill formation and skill-based preferences for social insurance. These extensions provide testable hypothesis about political support for the welfare state. Our model reconciles the disparate empirical findings and demonstrates how they, along with Iversen and Soskice’s seminal results, are special cases of the interaction between labor markets and politics.

A final, revised version to appear in the Quarterly Journal of Political Science, Volume 7, Issue 1, 2012, tentatively titled, "On the (Ir)relevnce of Skill Specificity for Social Insurance."

Keywords: specific skills, labor market, welfare state, human capital, wages, centralized bargaining

JEL Classification: J00, J41, J31, J65