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Are Early Educational Choices Affected by Unemployment Benefits? New Theory

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In this paper we contribute to the recent literature that has investigated the potential economic advantages of unemployment benefits, by developing a model where young individuals in education have to irreversibly choose a degree of specialisation positively related to future unemployment risk, market wages for different types of specialisation have to compensate risk-averse individuals for these risks. Unemployment benefits affect the incentives for specialisation and thereby the long-run composition of the workforce, the wage structure, and output. I address this issue in OLG search models with risk-aversion, talent heterogeneity, endogenous specialisation distributions, and competitive wage formation. The main results are that 1) higher unemployment benefits are related to higher mean specialisation and at low levels raise efficiency and welfare; 2) even though wages compensate for risks, unemployment risk and individual wages are generically negatively related when there is talent heterogeneity; 3) the composition of the workforce changes slowly with changing incentives, leading to long lags between welfare system changes and average outcomes (unemployment and output) and lead to longer lasting effects of shocks in regions with higher unemployment benefits.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 447.

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Date of creation: 06 Sep 2010
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Handle: RePEc:qld:uq2004:447

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  1. Gerard J. van den Berg & Aico van Vuuren, 2006. "The Effect of Search Frictions on Wages," Tinbergen Institute Discussion Papers 06-077/3, Tinbergen Institute.
  2. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  3. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
  4. Amable, Bruno & Gatti, Donatella, 2001. "The Impact of Product Market Competition on Employment and Wages," IZA Discussion Papers 276, Institute for the Study of Labor (IZA).
  5. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," NBER Working Papers 7352, National Bureau of Economic Research, Inc.
  6. Aumann, Robert J., 1977. "The St. Petersburg paradox: A discussion of some recent comments," Journal of Economic Theory, Elsevier, vol. 14(2), pages 443-445, April.
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