Should I Stay (in School) or Should I Go (to Work)
Lee Tyrrell-Hendry
Journal of Public Economics, 2024, vol. 239, issue C
Abstract:
I explore optimal education subsidies and progressivity of labour taxes in a model with stochastic human capital accumulation and incomplete markets, endogenous labour supply and an education choice modelled as a real option, where agents choose an optimal number of years to study before starting work. In a purely analytical Baseline model with tight borrowing constraints on students, which leads to a no-trade equilibrium without savings, the government pays for education via transfers to students or – equivalently – via grants to universities. The social welfare-maximising policy features generous education subsidies and highly progressive labour taxes, much more so than currently seen in the US or Europe, and results in an average consumption-equivalent gain of 8%. This result is robust to myriad extensions, including a Quantitative model with relaxed financial frictions where students can borrow to finance their education, and where hence the equilibrium features extensive precautionary saving by workers.
Keywords: Macroeconomics; Public economics; Education (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:239:y:2024:i:c:s0047272724001622
DOI: 10.1016/j.jpubeco.2024.105226
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