Misallocation of Talent and Human Capital: Political Economy Analysis

Mismatches in the labor market, specifically because of underrepresentation of various population groups, carry significant economic cost. In this paper we argue, using a simple analytical model, that an additional cost component is related to the effect of such underrepresentation on incentives to invest in human capital, which results in a mutual feedback relationship between the labor market and the skill acquisition market and may lead to economy's divergence. Further, under increasing returns to scale in human capital, it is shown that an initially advantaged group has an incentive to minimize the bias against the disadvantaged group, and that political enfranchisement is the means to achieve a commitment to such a policy. It is argued that this is consistent with empirical regularities.