Policies to Create and Destroy Human Capital in Europe
AbstractTrends in skill bias and greater turbulence in modern labor markets put wages and employment prospects of unskilled workers under pressure. Weak incentives to utilize and maintain skills over the life-cycle become manifest with the ageing of the population. Policies to promote human capital formation reduce welfare state dependency among the unskilled and offset inefficiencies in human capital formation. Skill formation features strong dynamic complementarities over the life-cycle. Investments in the human capital of children have higher returns than investments in the human capital of older workers. There is no trade-off between equity and efficiency at early ages of human development but there is a substantial trade-off at later ages. Later remediation of skill deficits acquired in early years often does not meet the cost-benefit criterion. Positive returns to active labor market and training policies are doubtful. Skill formation is impaired when the returns to skill formation are low due to low skill use and insufficient skill maintenance later on in life. High marginal tax rates and generous benefit systems reduce labor force participation rates and hours worked and thereby lower the utilization rate of human capital. Tax-benefit systems redistribute resources from outsiders to insiders in labor markets, which can be both distortionary and inequitable. Actuarially fairer early retirement and pension schemes reduce the incentives to retire early and strengthen incentives for human capital investment by increasing the time-horizon over which returns to human capital are harvested.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15742.
Date of creation: Feb 2010
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Other versions of this item:
- Heckman, James J. & Jacobs, Bas, 2009. "Policies to Create and Destroy Human Capital in Europe," IZA Discussion Papers 4680, Institute for the Study of Labor (IZA).
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H5 - Public Economics - - National Government Expenditures and Related Policies
- I2 - Health, Education, and Welfare - - Education
- I3 - Health, Education, and Welfare - - Welfare and Poverty
- J2 - Labor and Demographic Economics - - Demand and Supply of Labor
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-06 (All new papers)
- NEP-EEC-2010-03-06 (European Economics)
- NEP-HRM-2010-03-06 (Human Capital & Human Resource Management)
- NEP-LAB-2010-03-06 (Labour Economics)
- NEP-LTV-2010-03-06 (Unemployment, Inequality & Poverty)
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