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Equilibrium underemployment

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  • Jackson, Paul

Abstract

This paper develops a model of human capital investment in a frictional labor market with two-sided heterogeneity and liquidity constraints. The model generates underemployment in equilibrium: workers are employed in jobs for which they are over-qualified. Subsidizing education can decrease the returns to human capital investment, increase the underemployment rate, and decrease the unemployment rate. I calibrate the model to the U.S. economy and find the aggregate supply of human capital and underemployment rate are inefficiently low. The constrained-efficient allocation is implemented by increasing unemployment benefits and subsidizing both the creation of high-skill jobs and human capital investment.

Suggested Citation

  • Jackson, Paul, 2023. "Equilibrium underemployment," Labour Economics, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:labeco:v:81:y:2023:i:c:s092753712300009x
    DOI: 10.1016/j.labeco.2023.102334
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    More about this item

    Keywords

    Underemployment; Human capital; Education subsidies;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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