Stochastic Labour Market Shocks, Labour Market Programmes, and Human Capital Formation: A Theoretical and Empirical Analysis

University of St. Gallen, Department of Economics, Discussion Paper No. 2007-27

66 Pages Posted: 6 Aug 2007

See all articles by Michael Lechner

Michael Lechner

University of St. Gallen - Swiss Institute for Empirical Economic Research

R. Vazquez-Alvarez

University of St. Gallen - Swiss Institute for International Economics and Applied Economic Research

Date Written: July 2007

Abstract

This paper develops a life-cycle model of labour supply that captures endogenous human capital formation allowing for individual's heterogeneous responses to stochastic labour market shocks. The shocks determines conditions in the labour market and sort individuals into three labour market regimes; employment, unemployment with and unemployment without participation in labour market programmes. The structural model entails time independent stochastic shocks that have transitory effects on monetary returns while the effect on human capital formation may be permanent. The permanent effect may justify the existence of active labour market programmes if these programmes imply non-depreciating human capital and human capital depreciation is detected for the non-participant unemployed. Using several years of the Swiss Labour Force Survey (SAKE, 1991 - 2004) the empirical section compares the dynamic formation of human capital between labour market regimes. The results are consistent with the assumptions of the structural model and suggest human capital depreciation for unemployment without programme participation. They further show that labour programmes may act as a buffer to reduce human capital loss while unemployed.

Keywords: Human capital formation, life‐cycle labour supply models, active labour market policies, search activities, productivity shocks, unemployment

JEL Classification: D31, D91, J24, J68

Suggested Citation

Lechner, Michael and Vazquez-Alvarez, Rosalia, Stochastic Labour Market Shocks, Labour Market Programmes, and Human Capital Formation: A Theoretical and Empirical Analysis (July 2007). University of St. Gallen, Department of Economics, Discussion Paper No. 2007-27, Available at SSRN: https://ssrn.com/abstract=1005061 or http://dx.doi.org/10.2139/ssrn.1005061

Michael Lechner (Contact Author)

University of St. Gallen - Swiss Institute for Empirical Economic Research ( email )

Varnbuelstrasse 14
St. Gallen, 9000
Switzerland
+41 71 224 2320 (Phone)

Rosalia Vazquez-Alvarez

University of St. Gallen - Swiss Institute for International Economics and Applied Economic Research ( email )

Dufourstr. 48
St. Gallen, 9000
Switzerland

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