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Increasing Returns to Education and the Skills Under-Investment Trap

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  • Booth, Alison L.

    ()
    (Australian National University)

  • Coles, Melvyn

    ()
    (University of Essex)

Abstract

We model educational investment and labor supply in a competitive economy with home and market production. Heterogeneous workers are assumed to have different productivities both at home and in the workplace. We investigate the degree to which there is under-investment in human capital, and examine the deadweight losses that accrue via distortionary taxes. We show that there are increasing returns to education at the participation margin, and that deadweight losses are most severe for workers located here. Although the social planner's optimum implies the worker should choose a high level of education and participate in the market sector, instead the worker chooses not to invest in human capital and either non-participation or partial participation in market-sector work. A severe deadweight loss is generated by this substitution effect. Those individuals most likely to be in this trap are those types with large enough home productivity, who are likely either to be involved in home production or to be characterized by a strong preference for other non-market sector activities.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1657.

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Length: 32 pages
Date of creation: Jul 2005
Date of revision:
Publication status: published as 'A Microfoundation for Increasing Returns in Human Capital Accumulation and the Under-Participation Trap' in: European Economic Review, 2007, 51 (7), 1661-1681
Handle: RePEc:iza:izadps:dp1657

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Keywords: income tax; returns to education; home production; labor supply;

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  1. Pietro Garibaldi & Etienne Wasmer, 2004. "Raising Female Employment: Reflections and Policy Tools," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 320-330, 04/05.
  2. Antonio Merlo, 2004. "Introduction To Economic Models Of Crime," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(3), pages 677-679, 08.
  3. Acemoglu, Daron, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 779-804, August.
  4. Florence Jaumotte, 2003. "Female Labour Force Participation: Past Trends and Main Determinants in OECD Countries," OECD Economics Department Working Papers 376, OECD Publishing.
  5. Reuben Gronau, 1976. "Leisure, Home Production and Work--The Theory of The Allocation of Time Revisited," NBER Working Papers 0137, National Bureau of Economic Research, Inc.
  6. Vella, F, 1992. "Simple Tests for Sample Selection Bias in Censored and Discrete Choice Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(4), pages 413-21, Oct.-Dec..
  7. Sandmo, Agnar, 1990. "Tax Distortions and Household Production," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 78-90, January.
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Cited by:
  1. Mendolicchio, Concetta & Paolini, Dimitri & Pietra, Tito, 2011. "Investments in education and welfare in a two-sector, random matching economy," IAB Discussion Paper 201108, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].

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