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Increasing Returns to Education and the Skills Under-Investment Trap

  • Booth, Alison L.

    ()

    (Australian National University)

  • Coles, Melvyn

    ()

    (University of Essex)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1657.

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Length: 32 pages
Date of creation: Jul 2005
Date of revision:
Publication status: published as 'A Microfoundation for Increasing Returns in Human Capital Accumulation and the Under-Participation Trap' in: European Economic Review, 2007, 51 (7), 1661-1681
Handle: RePEc:iza:izadps:dp1657
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  1. Sandmo, Agnar, 1990. "Tax Distortions and Household Production," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 78-90, January.
  2. Pietro Garibaldi & Etienne Wasmer, 2004. "Raising female employment: Reflections and policy tools," ULB Institutional Repository 2013/169583, ULB -- Universite Libre de Bruxelles.
  3. Gronau, Reuben, 1977. "Leisure, Home Production, and Work-The Theory of the Allocation of Time Revisited," Journal of Political Economy, University of Chicago Press, vol. 85(6), pages 1099-1123, December.
  4. 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, 08.
  5. 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.
  6. Vella, F, 1992. "Simple Tests for Sample Selection Bias in Censored and Discrete Choice Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(4), pages 413-21, Oct.-Dec..
  7. L. Randall Wray & Stephanie Bell, 2004. "Introduction," Chapters, in: Credit and State Theories of Money, chapter 1 Edward Elgar.
  8. Florence Jaumotte, 2003. "Female Labour Force Participation: Past Trends and Main Determinants in OECD Countries," OECD Economics Department Working Papers 376, OECD Publishing.
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