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Stochastic labour market shocks, labour market programmes, and human capital formation: a theoretical and empirical analysis

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  • Michael Lechner

    ()
    (Swiss Institute for International Economics and Applied Economic Research, University of St.Gallen.)

  • Rosalia Vazquez-Alvarez

    ()
    (Swiss Institute for International Economics and Applied Economic Research, University of St.Gallen.)

Abstract

This paper develops a life-cycle model of labour supply that captures endogenous human capital formation allowing for individual’s heterogeneous responses to stochastic labour market shocks. The shocks determines conditions in the labour market and sort individuals into three labour market regimes; employment, unemployment with and unemployment without participation in labour market programmes. The structural model entails time independent stochastic shocks that have transitory effects on monetary returns while the effect on human capital formation may be permanent. The permanent effect may justify the existence of active labour market programmes if these programmes imply non-depreciating human capital and human capital depreciation is detected for the non-participant unemployed. Using several years of the Swiss Labour Force Survey (SAKE, 1991 – 2004) the empirical section compares the dynamic formation of human capital between labour market regimes. The results are consistent with the assumptions of the structural model and suggest human capital depreciation for unemployment without programme participation. They further show that labour programmes may act as a buffer to reduce human capital loss while unemployed.

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Bibliographic Info

Paper provided by International Economics Institute, University of Valencia in its series Working Papers with number 0701.

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Length: 63 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:iei:wpaper:0701

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Keywords: Human capital formation; life-cycle labour supply models; active labour market policies; search activities; productivity shocks; unemployment.;

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  1. James Heckman & Lance Lochner & Ricardo Cossa, 2002. "Learning-By-Doing Vs. On-the-Job Training: Using Variation Induced by the EITC to Distinguish Between Models of Skill Formation," NBER Working Papers 9083, National Bureau of Economic Research, Inc.
  2. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
  3. Mark Huggett & Gustavo Ventura, 1998. "On the Distributional Effects of Social Security Reform," Working Papers 9801, Centro de Investigacion Economica, ITAM.
  4. repec:fth:inseep:9116 is not listed on IDEAS
  5. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explorations with a Dynamic General Equilibrium Model of Labor Earnings with Heterogeneous Agents," NBER Working Papers 6384, National Bureau of Economic Research, Inc.
  6. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  7. Luca Nunziata, 2001. "Labour Market Institutions and the Cyclical Dynamics of Employment," Economics Series Working Papers 1999-W26, University of Oxford, Department of Economics.
  8. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, September.
  9. Mark Huggett, 1995. "The one-sector growth model with idiosyncratic shocks," Discussion Paper / Institute for Empirical Macroeconomics 105, Federal Reserve Bank of Minneapolis.
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