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Unemployment benefits and educational choices

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  • Paul Frijters

    (School of Economics and Finance, Queensland University of Technology)

Abstract

In this paper it is argued that the risk-pooling role of unemployment beneÞts affects the irreversible choices of future labour market entrants. One such ex ante choice is education. Some types of education lead to general human capital that lead to almost certain employment. Other types of education are more specialised and lead to less secure employment. We address this issue in OLG search models that allow for risk-aversion, heterogeneity in talents, endogenous price formation of different specialisations, and competitive wage formation. We Þnd that in the absence of unemployment beneÞts, the percentage of individuals taking high-risk specialised education is ineffeciently low. Those with higher innate abilities are typically found to take lower degrees of specialisation, implying that the relation between wages and risks at the individual level is the reverse from what it is at the aggregate level. We Þnd that an unemployment beneÞt (UB) system raises efficiency and welfare because it promotes efficient specialisation. Because education takes time, it takes a long time before the composition of the workforce has adapted to changing incentives. With a calibrated model we explore such lags between unexpected changes in circumstances and outcomes.

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Bibliographic Info

Paper provided by School of Economics and Finance, Queensland University of Technology in its series Paul Frijters Discussion Papers with number 2001.

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Date of creation: 15 Jun 2001
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Handle: RePEc:qut:pfrijt:2001

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Keywords: Child Allowances; Altruism; Exchange; Inter-Household; Intra-Household;

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  1. Burdett, Kenneth, 1979. "Unemployment Insurance Payments as a Search Subsidy: A Theoretical Analysis," Economic Inquiry, Western Economic Association International, vol. 17(3), pages 333-43, July.
  2. Bonnal, Liliane & Fougere, Denis & Serandon, Anne, 1997. "Evaluating the Impact of French Employment Policies on Individual Labour Market Histories," Review of Economic Studies, Wiley Blackwell, vol. 64(4), pages 683-713, October.
  3. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," NBER Working Papers 7352, National Bureau of Economic Research, Inc.
  4. Daniel, Christophe & Sofer, Catherine, 1998. "Bargaining, Compensating Wage Differentials, and Dualism of the Labor Market: Theory and Evidence for France," Journal of Labor Economics, University of Chicago Press, vol. 16(3), pages 546-75, July.
  5. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, 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.
  7. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
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