Public investment and human capital with segmented labour markets

Edward F Buffie, Christopher Adam, Luis-Felipe Zanna, Lacina Balmae, Dawit Tessema and Kangni Kpodar

Oxford Economic Papers, 2024, vol. 76, issue 1, 162-186

Abstract: We develop a dynamic general equilibrium macroeconomic model with segmented labour markets and efficiency wages to examine how labour market structures influence the impact of human capital investment in low-income countries. For plausible calibration values, public investment in education is much more effective than infrastructure investment in promoting long-run economic development, but because investment in education affects labour productivity with a lag, policymakers face an intertemporal trade-off which depends on their social discount rate and the weight of distributional objectives in the social welfare function. We show the distortionary structure of labour markets matters in leveraging welfare gains from public investment and in shifting the optimal public investment programme further in favour of human capital, relative to the case of flex-wage full-employment labour markets.

JEL-codes: E62 F34 H54 H63 I25 I31 O43 (search for similar items in EconPapers)
Date: 2024
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