A microfoundation for increasing returns in human capital accumulation and the under-participation trap

Alison L. Booth, Melvyn Coles

Research output: Contribution to journalArticlepeer-review

Abstract

This paper considers educational investment, wages and hours of market work in an imperfectly competitive labour market with heterogeneous workers and home production. It investigates the degree to which there might be both underemployment in the labour market and underinvestment in education. A central insight is that the ex post participation decision of workers endogeneously generates increasing marginal returns to education. Although equilibrium implies underinvestment in education, optimal policy is not to subsidise education. Instead it is to subsidise labour market participation which we argue might be efficiently targeted as state-provided childcare support.

Original languageEnglish (US)
Pages (from-to)1661-1681
Number of pages21
JournalEuropean Economic Review
Volume51
Issue number7
DOIs
StatePublished - Oct 2007

Keywords

  • Education
  • Home production
  • Hours of work
  • Imperfect competition

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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