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Labor-Market Integration, Investment in Risky Human Capital, and Fiscal Competition

David E. Wildasin
The American Economic Review
Vol. 90, No. 1 (Mar., 2000), pp. 73-95
Stable URL: http://www.jstor.org/stable/117282
Page Count: 23
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Labor-Market Integration, Investment in Risky Human Capital, and Fiscal Competition
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Abstract

This paper presents a general-equilibrium model where human capital investment increases specialization and exposes skilled workers to region-specific earnings risk. Interjurisdictional mobility of skilled labor mitigates these risks; state-contingent migration of skilled labor also improves efficiency. With perfect capital markets, labor-market integration raises welfare and reduces ex post earnings inequality. If instead human capital investment can only be financed through local taxes, labor-market integration leads to interjurisdictional fiscal competition, shifting the burden of taxation to low-skilled immobile workers. Decentralized public provision of human capital investment creates earnings inequalities and is inefficient.

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