Human Capital Investment with Competitive Labor Search

36 Pages Posted: 6 Oct 2008

See all articles by Leo Kaas

Leo Kaas

University of Konstanz - Faculty of Economics and Statistics; IZA Institute of Labor Economics

Stefan Zink

University of Konstanz

Abstract

We study human capital accumulation in an environment of competitive search. Given that unemployed workers can default on their education loans, skilled individuals with a larger debt burden prefer riskier but better paid careers than is socially desirable. A higher level of employment risk in turn depresses the skill premium and the incentives to invest in education.The equilibrium allocation is characterized by too much unemployment, underinvestment by the poor, and too little investment in skill-intensive technologies. A public education system funded by graduate taxes can restore efficiency. More generally, differences in education funding can account for cross-country variations in wage inequality.

Keywords: directed search, investment, education finance

JEL Classification: I22, J24, J31

Suggested Citation

Kaas, Leo and Zink, Stefan, Human Capital Investment with Competitive Labor Search. IZA Discussion Paper No. 3722, Available at SSRN: https://ssrn.com/abstract=1278922 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Leo Kaas (Contact Author)

University of Konstanz - Faculty of Economics and Statistics ( email )

Universitaetsstr. 10
78457 Konstanz
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Stefan Zink

University of Konstanz ( email )

Fach D-144
Universit├Ątsstra├če 10
Konstanz, D-78457
Germany

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