DP921 Unemployment and Increasing Returns to Human Capital

Author(s): Gilles Saint-Paul
Publication Date: February 1994
Keyword(s): Education, Multiple Equilbria, Unemployment, Wage Rigidity
JEL(s): E24, I2, J24, J31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=921

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.