Unemployment and Increasing Returns to Human Capital

Gilles Saint-Paul

No 921, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies a model of human capital accumulation with real wage rigidity. It is shown that the arbitrage condition between hiring a skilled versus an unskilled worker may be stated as a positive relationship between their relative unemployment rates. It may be the case that this locus is steep enough to generate increasing returns to education. This may lead to multiple equilibria: a high-education equilibrium may coexist with a low-education equilibrium. In the former, the unskilled are more exposed to unemployment relative to the skilled, as compared with the latter. The two equilibria cannot be Pareto-ranked, but the latter is preferred to the former by workers, while `savers' prefer the high-education equilibrium.

Keywords: Education; Multiple Equilbria; Unemployment; Wage Rigidity (search for similar items in EconPapers)
JEL-codes: E24 I2 J24 J31 (search for similar items in EconPapers)
Date: 1994-02
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Citations: View citations in EconPapers (3)

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