Question

Recall that "human capital" refers to skills and expertise that workers develop. General human capital is that which makes a worker highly productive in potential jobs with many different employers. Specific human capital is that which makes a worker highly productive with only a single employer. What kind of investment in human capital should you make to increase your bargaining power with an employer, general or specific? Why? Do valuable outside options enhance or diminish your bargaining power?

Short answer

Invest in general human capital to increase bargaining power. Valuable outside options enhance bargaining power.

Step-by-step solution

Understanding the Types of Human Capital

General human capital includes skills and knowledge that are transferable and useful to a wide range of employers. Examples include communication skills, certifications in widely-used software, or advanced education. Specific human capital refers to skills and knowledge particularly valuable to a specific employer, like knowledge of proprietary systems or specialized training relevant only to that company.

Determining the Impact on Bargaining Power

To increase bargaining power, an employee would benefit more from investing in general human capital. This type of human capital provides flexibility and options, as it allows an employee to be productive with multiple employers. If one employer does not meet the employee's needs, they can potentially find another employer who will.

Evaluating the Role of Outside Options

Having valuable outside options generally enhances an employee's bargaining power. When an employee can demonstrate that their skills are in demand elsewhere, they can negotiate better terms within their current employment. This is because the employer must offer competitive conditions to retain the employee.

Key concepts

Bargaining Power

Bargaining power is the leverage an employee holds in negotiations with their employer. It determines how effectively one can negotiate salaries, benefits, and working conditions. The strength of bargaining power largely depends on how replaceable the worker is and what alternatives they have available.

Employees with high bargaining power typically have valuable skills and options outside of their current role. This makes them indispensable or hard to replace, pushing employers to make better offers to retain them.
Bargaining power isn't static and shifts according to market demand, the individual's skills, and their career choices.

General Human Capital

General human capital encompasses skills and knowledge that enhance an individual's productivity, regardless of the employer. Think of skills like project management, proficiency with widely-used software, or strong analytical abilities.

These skills increase an employee's value across many contexts and companies, providing flexibility in career choices. General human capital expands job opportunities and builds a strong foundation for career growth.

• Increases employability in diverse fields.
• Offers the ability to switch industries or career paths.
• Builds a broad network of potential employers.

Specific Human Capital

While general human capital is broad, specific human capital is focused. It consists of skills and knowledge that pertain to a specific company or role. For instance, learning the ins and outs of a company's internal software or mastering a unique manufacturing process.

Investments in specific human capital can make a worker invaluable to one particular employer. However, while expertise in specific systems can increase immediate job security, it often limits future job mobility, as these skills may not be transferable.

• Enhances role-specific productivity.
• Bolsters short-term job security within the company.
• Losens opportunities for switching jobs or industries.

Skills and Expertise

Skills and expertise form the foundation of a worker's human capital, influencing both their general and specific human capital. Skills can range from technical abilities like coding to soft skills like leadership and communication. Expertise is often cultivated over time, through education, training, and practice.

Possessing a blend of these skills makes an individual versatile and attractive to employers.

• Fosters innovation and problem-solving.
• Supports career advancement and higher salaries.
• Acts as a differentiator in competitive job markets.

Outside Options

Outside options refer to the alternative career opportunities available to a worker. These can significantly enhance an individual's bargaining power.
When an employee has credible job offers from other companies, they hold a stronger position in negotiations. Employers are more inclined to offer better terms to retain valuable employees who have attractive outside options.

• Increase an employee's negotiating leverage.
• Encourage employers to match offers from competitors.
• Mitigate the risks of being tied to a single employer's terms.