Comovement of labor supply and human capital investment in policy analysis

Abstract

Quantitative studies of human capital report the comovement of labor and human capital investment in response to policy changes, which is usually understood based on the intuition that human capital is utilized only while working: both inputs are complements in the formation of effective labor. Given the lack of (i) theoretical analysis of exact conditions and (ii) the preference-side intuition that both inputs involve disutility leading to a similar comovement, we fill the gap. The general condition for the comovement specifies the minimum extent of disutility smoothing between labor and human capital investment, and the prior intuition relaxes this condition, raising comovement possibilities. The conclusion has wide applicabilities in policy analysis.