Discussion Paper Details

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Title: Unemployment and Increasing Returns to Human Capital

Author(s): Gilles Saint-Paul

Publication Date: February 1994

Keyword(s): Education, Multiple Equilbria, Unemployment and Wage Rigidity

Programme Area(s): International Macroeconomics

Abstract: This paper studies a model of human capital accumulation with real wage rigidity. It is shown that the arbitrage condition between hiring a skilled versus an unskilled worker may be stated as a positive relationship between their relative unemployment rates. It may be the case that this locus is steep enough to generate increasing returns to education. This may lead to multiple equilibria: a high-education equilibrium may coexist with a low-education equilibrium. In the former, the unskilled are more exposed to unemployment relative to the skilled, as compared with the latter. The two equilibria cannot be Pareto-ranked, but the latter is preferred to the former by workers, while `savers' prefer the high-education equilibrium.

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Bibliographic Reference

Saint-Paul, G. 1994. 'Unemployment and Increasing Returns to Human Capital'. London, Centre for Economic Policy Research.