Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

Abstract: The division of labor is fundamental to how firms organize production. Since Adam Smith, economists have recognized that dividing tasks more finely increases productivity through specialization but also raises coordination costs—a tradeoff formalized by Becker and Murphy (1992). Yet we have little systematic evidence on how this tradeoff operates within firms. Moreover, this classical perspective overlooks a second, dynamic tradeoff: firms not only produce output, but also develop a central input into future production—their workers’ human capital. A finer division of labor allows workers to develop greater expertise through repeated performance of narrowly defined tasks, but may also reduce opportunities to learn from coworkers by limiting interactions and knowledge exchange. We study both tradeoffs using population-wide Norwegian employer–employee records, linked workplace surveys, quasi-experimental variation in coworker availability, and randomized experiments with workers and managers. We find that more specialized firms exhibit higher productivity but also greater coordination costs. Their workers report more learning-by-doing but substantially less coworker learning, resulting in lower overall learning and slower wage growth. To establish the importance of coworker learning for human capital accumulation, we exploit extended coworker absences and show that losing access to colleagues reduces subsequent wage growth, particularly in occupations characterized by greater task overlap and coworker learning. To isolate the role of the division of labor from other workplace characteristics, we conduct randomized experiments that vary task allocation in otherwise identical workplaces. Workers and managers anticipate greater coordination demands, weaker coworker interactions, and lower skill accumulation under greater specialization. The experiments then ask workers to choose their preferred workplace and managers how they would organize production. Both favor greater task overlap, citing coworker interactions and learning opportunities as key reasons for their choices. Together, our findings show that the division of labor shapes not only the efficiency of current production but also the accumulation of human capital and future productive capacity.

Keywords: division of labor; learning; firm organization

JEL-codes: D21; J24; L25

Language: English

104 pages, October 16, 2026

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