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Speaker:
Pedro Gomes (Birkbeck, University of London)

Human Capital and Financial Development: Firm-Level Interactions and Macroeconomic Implications

^{(joint with Lian Allub and Zoe Kuehn)}

Abstract: Capital-skill complementarity in production implies non-trivial interactions between availability of human capital and financial constraints. Firms that are constrained in their access to finance hire a lower proportion of skilled workers compared to unconstrained firms. Conversely, a lack of human capital increases skilled wages, reducing firms’ desired capital intensity and thus loosening effective financial constraints. To assess the macroeconomic implications of such firm-level interactions, we build an occupational-choice model with capital-skill complementarity in production which we calibrate to US data. We vary financial frictions, educational attainment, and TFP across countries, and we quantify how aggregate output, wage inequality, and entrepreneurship are affected by financial market liberalizations and increases in educational attainment. For aggregate output, the joint effect of both factors is, on average 30 per cent larger compared to the sum of the individual effects. In countries with a negligible share of tertiary educated workers and low TFP, financial development has only small effects on aggregate output.

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