Faculty of Economics and Business Administration Publications Database

Human capital investment with competitive labor search

Zink, Stefan
Volume: 55
Pages: 520 - 534
Month: May
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2011
Keywords: Directed search; Investment; Education finance

We study human capital accumulation in the presence of labor search frictions. 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 low employment, underinvestment by the poor, and too little investment in skill-intensive technologies. A public education system funded by graduate taxes can restore efficiency, and it would also reduce wage inequality.