Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 17-2004: Skill level, Cognitive Ability, Unemployment and Welfare

Birthe Larsen
Additional contact information
Birthe Larsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

Abstract: This paper examines the implications of that workers may not be able to estimate their true costs of acquiring skills. Consequently, too few workers may acquire skills. This allows for the possibility that subsidizing education is welfare improving. Furthermore, if the presence of skill-biased technological shocks increase unemployment, this may explain why the market it-self cannot respond to this by making it sufficiently attractive to acquire skills. Consequently, the trade-off in-between subsidizing education and thereby reducing unemployment and optimizing welfare may be eliminated. We analyse this issue in a simple educational model and next in a search equilibrium model including a skill choice decision.

Keywords: Education; subsidies; efficiency; unemployment

JEL-codes: I20; J64

21 pages, September 16, 2004

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