Capital Holdup, Job Creation, and Skill Supply under Search Frictions / Shisham Adhikari, Si Guo.

Format:

Book

Government document

Author/Creator:

Adhikari, Shisham.

Contributor:

Guo, Si.

Series:

IMF Working Papers; Working Paper ; No. 2026/093

IMF Working Papers

Language:

English

Physical Description:

1 online resource (42 pages)

Place of Publication:

Washington, D.C. : International Monetary Fund, 2026.

Summary:

There has been renewed interest in revitalizing manufacturing, yet policy often confronts a circular challenge: firms hesitate to expand because they cannot reliably find suitably skilled workers (e.g., STEM-trained), while workers are reluctant to acquire those skills when jobs remain limited. This raises a policy question: intervene at the firm margin or the worker margin, or both? We study this question by extending Acemoglu and Shimer (1999) to a two-sector open-economy. The key friction is capital holdup: firms invest upfront to create jobs, but sunk investment weakens their wage bargaining positions, discouraging investment ex-ante. Because manufacturing is more capital intensive, holdup is more severe, leaving manufacturing employment inefficiently low. In the calibrated model, this inefficiency-induced industrial employment shortfall is about 1 percent of total employment – roughly one-fifth of LAC-East Asia gap. When Hosios condition holds, the optimal policy can be solely on the firm side: an investment subsidy financed by an employment tax on firms. When Hosios condition fails, an additional wedge distorting workers’ sectoral choices emerges, and targeted training subsidies become welfare-improving.

Notes:

Description based on print version record.

ISBN:

9798229045766