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Increasing Returns to Education and the Skills Under-Investment Trap

Author

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  • Booth, Alison L.

    () (Australian National University)

  • Coles, Melvyn

    () (University of Essex)

Abstract

We model educational investment and labor supply in a competitive economy with home and market production. Heterogeneous workers are assumed to have different productivities both at home and in the workplace. We investigate the degree to which there is under-investment in human capital, and examine the deadweight losses that accrue via distortionary taxes. We show that there are increasing returns to education at the participation margin, and that deadweight losses are most severe for workers located here. Although the social planner's optimum implies the worker should choose a high level of education and participate in the market sector, instead the worker chooses not to invest in human capital and either non-participation or partial participation in market-sector work. A severe deadweight loss is generated by this substitution effect. Those individuals most likely to be in this trap are those types with large enough home productivity, who are likely either to be involved in home production or to be characterized by a strong preference for other non-market sector activities.

Suggested Citation

  • Booth, Alison L. & Coles, Melvyn, 2005. "Increasing Returns to Education and the Skills Under-Investment Trap," IZA Discussion Papers 1657, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp1657
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    References listed on IDEAS

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    1. Pietro Garibaldi & Etienne Wasmer, 2004. "Raising Female Employment: Reflections and Policy Tools," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 320-330, 04/05.
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    6. Antonio Merlo, 2004. "Introduction To Economic Models Of Crime," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(3), pages 677-679, August.
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    Cited by:

    1. 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.

    More about this item

    Keywords

    income tax; returns to education; home production; labor supply;

    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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