Human Capital Misallocation: Implications and Contributing Factors

Human capital misallocation has significant implications for total factor productivity, output, and well-being, as highlighted by Agénor (2017) and Bandyopadhyay et al. (2019). Additionally, such misallocation can have a lasting impact on the future supply of human capital by shaping the academic aspirations and school choices of children. Goldin and Katz (2008) have observed a notable increase in the proportion of Harvard undergraduate students employed in the finance sector since 1970, while Friedman-Sokuler and Justman (2016) have noted the underrepresentation of girls in STEM subjects. Various studies have attempted to identify relevant factors contributing to human capital misallocation, including institutional factors such as lack of material incentives (Acemoglu, 1995; Lockwood et al., 2017; Wu, 2017), imperfect factor markets (D׳Erasmo et al., 2014; Abdulla, 2019), and weak social security (Corneo, 2013; Benhabib and Hager, 2021). Additionally, non-institutional factors such as group bias based on gender, race, or ethnicity can also contribute to misallocation, as noted by Gradstein (2019).