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A Microfoundation For Increasing Returns In Human Capital Accumulation And The Under-Participation Trap

  • Alison Booth


  • Melvyn Coles

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 endogenously 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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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-07.

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Length: 26 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:een:camaaa:2007-07
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  1. 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.
  2. Booth, Alison L & Coles, Melvyn G, 2007. "The Impact of Fiscal Policy on Labour Supply and Education in an Economy with Household and Market Production," CEPR Discussion Papers 6265, C.E.P.R. Discussion Papers.
  3. 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 257-73, May.
  4. Katharina Wrohlich, 2005. "The Excess Demand for Subsidized Child Care in Germany," Discussion Papers of DIW Berlin 470, DIW Berlin, German Institute for Economic Research.
  5. Daron Acemoglu & Jorn-Steffen Pischke, 1998. "The Structure of Wages and Investment in General Training," NBER Working Papers 6357, National Bureau of Economic Research, Inc.
  6. Barbara Petrongolo, 2004. "Gender segregation in employment contracts," LSE Research Online Documents on Economics 3662, London School of Economics and Political Science, LSE Library.
  7. Stevens, Margaret, 1994. "A Theoretical Model of On-the-Job Training with Imperfect Competition," Oxford Economic Papers, Oxford University Press, vol. 46(4), pages 537-62, October.
  8. Booth, Alison L & Coles, Melvyn G & Gong, Xiaodong, 2007. "Increasing Returns to Education: Theory and Evidence," CEPR Discussion Papers 6266, C.E.P.R. Discussion Papers.
  9. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  10. 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.
  11. Apps, Patricia F & Rees, Ray, 1997. "Collective Labor Supply and Household Production," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 178-90, February.
  12. A. L. Booth & Melvyn Coles, 2005. "Education, Matching and the Allocative Value of Romance," Working Papers 205, Barcelona Graduate School of Economics.
  13. Petrongolo, Barbara, 2004. "Gender Segregation in Employment Contracts," CEPR Discussion Papers 4303, C.E.P.R. Discussion Papers.
  14. Acemoglu, Daron, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 779-804, August.
  15. repec:inr:wpaper:155908 is not listed on IDEAS
  16. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
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