A Microfoundation for Increasing Returns in Human Capital Accumulation and the Under-participation Trap

Alison Booth, Melvyn G Coles

    Research output: Contribution to journalArticle

    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
    Pages (from-to)1661-1681
    JournalEuropean Economic Review
    Volume51
    Issue number7
    DOIs
    Publication statusPublished - 2007

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