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A microfoundation for increasing returns in human capital accumulation and the under-participation trap

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  • Booth, Alison L.
  • Coles, Melvyn

Abstract

This paper considers educational investment, wages and hours of market work in an imperfectly competitive labour market with heterogeneous workers and home production. It investigates the degree to which there might be both underemployment in the labour market and underinvestment in education. A central insight is that the ex-post participation decision of workers endogeneously generates increasing marginal returns to education. Although equilibrium implies underinvestment in education, optimal policy is not to subsidise education. Instead it is to subsidise labour market participation which we argue might be efficiently targeted as state provided childcare support.
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Suggested Citation

  • Booth, Alison L. & Coles, Melvyn, 2007. "A microfoundation for increasing returns in human capital accumulation and the under-participation trap," European Economic Review, Elsevier, vol. 51(7), pages 1661-1681, October.
  • Handle: RePEc:eee:eecrev:v:51:y:2007:i:7:p:1661-1681
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    References listed on IDEAS

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    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
    2. Barbara Petrongolo, 2004. "Gender Segregation in Employment Contracts," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 331-345, 04/05.
    3. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, vol. 70(6), pages 2295-2350, November.
    4. Katharina Wrohlich, 2008. "The excess demand for subsidized child care in Germany," Applied Economics, Taylor & Francis Journals, vol. 40(10), pages 1217-1228.
    5. Alison Booth & Melvyn Coles, 2007. "The Impact Of Fiscal Policy On Labor Supply And Education In An Economy With Household And Market Production," CAMA Working Papers 2007-08, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Daron Acemoglu & Jorn-Steffen Pischke, 1999. "The Structure of Wages and Investment in General Training," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 539-572, June.
    7. Apps, Patricia F & Rees, Ray, 1997. "Collective Labor Supply and Household Production," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 178-190, February.
    8. Alison Booth & Melvyn Coles, 2010. "Education, Matching, and the Allocative Value of Romance," Journal of the European Economic Association, MIT Press, vol. 8(4), pages 744-775, June.
    9. Alison Booth & Melvyn Coles & Xiaodong Gong, 2006. "Increasing Returns to Education: Theory and Evidence," CEPR Discussion Papers 522, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    10. Bhaskar, V & To, Ted, 1999. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Economic Journal, Royal Economic Society, vol. 109(455), pages 190-203, April.
    11. Stevens, Margaret, 1994. "A Theoretical Model of On-the-Job Training with Imperfect Competition," Oxford Economic Papers, Oxford University Press, vol. 46(4), pages 537-562, October.
    12. Alan Manning & Ted To, 2002. "Oligopsony and Monopsonistic Competition in Labor Markets," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 155-174, Spring.
    13. Daron Acemoglu, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 779-804.
    14. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-273, May.
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    Citations

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    Cited by:

    1. Booth, Alison L., 2014. "Wage determination and imperfect competition," Labour Economics, Elsevier, vol. 30(C), pages 53-58.
    2. Jahn, Elke & Hirsch, Boris, 2012. "Is there monopsonistic discrimination against immigrants? First evidence from linked employer employee data," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65417, Verein für Socialpolitik / German Economic Association.
    3. Alison L. Booth & Hiau Joo Kee, 2009. "Intergenerational Transmission of Fertility Patterns," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(2), pages 183-208, April.
    4. Helmuth Cremer & Pierre Pestieau & Maria Racionero, 2011. "Unequal wages for equal utilities," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(4), pages 383-398, August.
    5. Mendolicchio, Concetta & Paolini, Dimitri & Pietra, Tito, 2012. "Investments in education and welfare in a two-sector, random matching economy," Journal of Mathematical Economics, Elsevier, vol. 48(6), pages 367-385.
    6. Dildar, Yasemin, 2015. "Patriarchal Norms, Religion, and Female Labor Supply: Evidence from Turkey," World Development, Elsevier, vol. 76(C), pages 40-61.
    7. Björn Nilsson, 2017. "The School-to-work transition in developing countries," Working Papers DT/2017/07, DIAL (Développement, Institutions et Mondialisation).
    8. Booth, A.L. & Coles, M.G., 2010. "Tax policy and returns to education," Labour Economics, Elsevier, vol. 17(1), pages 291-301, January.
    9. Andrea Caragliu & Peter Nijkamp, 2014. "Cognitive Capital and Islands of Innovation: The Lucas Growth Model from a Regional Perspective," Regional Studies, Taylor & Francis Journals, vol. 48(4), pages 624-645, April.
    10. Alison Booth & Melvyn Coles, 2007. "The Impact Of Fiscal Policy On Labor Supply And Education In An Economy With Household And Market Production," CAMA Working Papers 2007-08, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    11. Darragh Flannery & Cathal O'Donoghue, 2012. "Utilising microsimulation to estimate new marginal returns to education: Ireland 1987-2011," Working Papers WP042012, University of Limerick, Department of Economics, revised Oct 2012.
    12. repec:mbr:jmonec:v:10:y:2015:i:1:p:23-63 is not listed on IDEAS

    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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