Torben Iverson. 2005. Capitalism, Democracy and Welfare

Torben Iverson. 2005. Capitalism, Democracy and Welfare. Cambridge University Press. Chapters 1 and 3.

Both workers and employers have interests in supporting the welfare state and providing workers with unemployment/social insurance and/or redistribution. Social protection solves market failures in the formation of skills. Workers have little incentive to invest in skills when they are at constant risk of losing their jobs and thus being unable to reap the benefits of their investment; employers have little incentive to invest in employee skills and training without institutions that prevent poaching and discourage unions from exploiting the potential holdup power that specific skills confer. Thus, social insurance encourages the acquisition of skills in the labor force, which in turn enhances the ability of some firms to compete in international markets.

Generally, portable skills do not require extensive nonmarket protection. The implication is that countries that focus on giving people general skills that are easily transferable should have less income redistribution because the cost of losing their jobs is relatively low (wage is based only on general skill and not special training and is therefore lower; also, the chances of finding a job after being laid off is high). Countries that focus on giving people firm or industry-specific skills complement increased costs to job loss with stronger social welfare programs. The result is that general skill systems are more likely to generate wage inequality and poverty traps because they limit opportunities and incentives for skill acquisition at the low end of the academic ability distribution.

Women should expect to experience greater wage inequality in firms/industries/countries that focus on specific skills rather than general skills. Positions that require specific skills are difficult to fill and, thus, cause firms to be more sensitive to interruptions. Women, saddled with the joy of carrying progeny around in their stomachs and family care, are at a greater risk of dropping out of the labor market than men. The result is that firms that require specialized training for its employees have less of an incentive to hire women. The weak position of women in the private labor market in specific skills countries is generally mitigated by public policies designed to give them greater employment opportunities and provide them goods such as daycare services.