Postgraduate degree holders experience lower cyclical wage variation than those with undergraduate degrees. Moreover, postgraduates have more speciﬁc human capital than undergraduates. Using an equilibrium search model with long-term contracts and imperfect monitoring of worker eﬀort, this paper attributes the cyclicality of the postgraduate-undergraduate wage gap to the diﬀerences in speciﬁc capital. Imperfect monitoring creates a moral hazard problem that requires ﬁrms to pay eﬃciency wages. More speciﬁc capital leads to lower mobility, thereby alleviating the moral hazard and improving risk-sharing. Estimates reveal that speciﬁc capital explains the diﬀerences both in labour turnover and in wage cyclicality across education groups.