Working Paper: CEPR ID: DP921
Authors: Gilles Saint-Paul
Abstract: This paper studies a model of human capital accumulation with real wage rigidity. It is shown that the arbitrage condition between hiring a skilled versus an unskilled worker may be stated as a positive relationship between their relative unemployment rates. It may be the case that this locus is steep enough to generate increasing returns to education. This may lead to multiple equilibria: a high-education equilibrium may coexist with a low-education equilibrium. In the former, the unskilled are more exposed to unemployment relative to the skilled, as compared with the latter. The two equilibria cannot be Pareto-ranked, but the latter is preferred to the former by workers, while `savers' prefer the high-education equilibrium.
Keywords: unemployment; education; wage rigidity; multiple equilibria
JEL Codes: E24; J24; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the proportion of skilled workers (J24) | higher relative unemployment rate for unskilled workers (F66) |
| rigidity of real wages (J39) | exacerbated unemployment among unskilled workers (F66) |
| high-education equilibrium (I25) | higher probability of unemployment for unskilled workers (F66) |
| high-education equilibrium (I25) | increased net returns to education (I26) |
| capitalists benefit from high-education equilibrium (P19) | workers may be worse off (J89) |