Labor Specialization and the Extent of the Market

Abstract

This paper presents an analytical model of labor specialization. Workers make human capital investment decisions on the depth and the breadth of their skill. Given that firms have diverse job requirements and increasing returns to scale, workers invest more for the depth of their human capital and less for the breadth as the size of the labor market increases. Also, the larger the size of the market, the more varieties of job requirements are used so that the average match between a worker and a firm improves.