Theory-Experimental Seminar

Pedro Gomes

Birkbeck, University of London


Seminar 3 – 14:30


Capital-skill complementarity in production implies a non-trivial interaction between human capital and financial constraints. At a firm level, firms that are constrained in their access to finance, hire a lower proportion of skilled labour than unconstrained firms. Conversely, high skilled wages, reduce firms’ desired capital intensity and the hence relieve the effective financial constraint. This has important macroeconomic implications. The gains from financial liberalization depend on countries’ educational attainment. Also, the gains from an education reform, depend on how developed the financial market is. We first investigate empirically the interaction between human capital and finance with cross-country and firm-level data. We then build an occupational choice model where individuals with different levels of educational attainment decide to set-up a firm or to work. Financial frictions restrain firm set-up and growth, and low educational attainment leads to higher wages for educated labor which reduces the hiring of skilled labor. But higher wages also imply that fewer educated individuals decide to become entrepreneurs. Our model allows us to quantify the importance of financial frictions and lack of skilled labor, as well as the combination of both, for explaining cross-country differences in entrepreneurship, average firm size and productivity as well as aggregate output. We find that the effect on output of a financial liberalization and educational reforms when taken together is 20 to 65 percent larger than the sum of the effects when implemented separately.

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