Fat Years, Lean Years: Human Capital and the Business Cycle
Knudsen, Lien & Wuebker (in review) Fat Years, Lean Years: Human Capital and the Business Cycle
How does firms ability to create and capture value from human capital vary over boom- and bust cycles?
Most prior work in strategic human capital has held the external environment stable when considering the relationship between employee mobility and employer investment. This paper relaxes this assumption. The central claim of this paper is that the business cycle alters the nature of investment problems associated with efficient investment in human capital. In a boom, the main problem is efficient investment in general human capital because the employee cannot credibly commit to staying in the firm. In a recession, the main challenge is efficient investment in firm-specific human capital because the firm cannot credibly commit to retain the employee. We show that the managerial remedies for these investment problems proposed in prior work work may be less effective, ineffective, or even counter-productive when business cycle effects are introduced. Our analysis also reveals alternative remedies firms can use to mitigate investment problems during different phases of the business cycle.