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Are Early Educational Choices Affected by Unemployment Benefits? New Theory

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In this paper we contribute to the recent literature that has investigated the potential economic advantages of unemployment benefits, by developing a model where young individuals in education have to irreversibly choose a degree of specialisation positively related to future unemployment risk, market wages for different types of specialisation have to compensate risk-averse individuals for these risks. Unemployment benefits affect the incentives for specialisation and thereby the long-run composition of the workforce, the wage structure, and output. I address this issue in OLG search models with risk-aversion, talent heterogeneity, endogenous specialisation distributions, and competitive wage formation. The main results are that 1) higher unemployment benefits are related to higher mean specialisation and at low levels raise efficiency and welfare; 2) even though wages compensate for risks, unemployment risk and individual wages are generically negatively related when there is talent heterogeneity; 3) the composition of the workforce changes slowly with changing incentives, leading to long lags between welfare system changes and average outcomes (unemployment and output) and lead to longer lasting effects of shocks in regions with higher unemployment benefits.

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  • Paul Frijters & Michael A. Shields, 2010. "Are Early Educational Choices Affected by Unemployment Benefits? New Theory," Discussion Papers Series 447, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:447
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    File URL: http://www.uq.edu.au/economics/abstract/447.pdf
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    1. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
    2. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages 1-33, March.
    3. Acemoglu, Daron & Shimer, Robert, 2000. "Productivity gains from unemployment insurance," European Economic Review, Elsevier, vol. 44(7), pages 1195-1224, June.
    4. van den Berg, Gerard J. & van Vuuren, Aico, 2010. "The effect of search frictions on wages," Labour Economics, Elsevier, vol. 17(6), pages 875-885, December.
    5. Aumann, Robert J., 1977. "The St. Petersburg paradox: A discussion of some recent comments," Journal of Economic Theory, Elsevier, vol. 14(2), pages 443-445, April.
    6. Amable, Bruno & Gatti, Donatella, 2001. "The Impact of Product Market Competition on Employment and Wages," IZA Discussion Papers 276, Institute for the Study of Labor (IZA).
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