Unemployment benefits and educational choices

In this paper it is argued that the risk-pooling role of unemployment beneÞts affects the irreversible choices of future labour market entrants. One such ex ante choice is education. Some types of education lead to general human capital that lead to almost certain employment. Other types of education are more specialised and lead to less secure employment. We address this issue in OLG search models that allow for risk-aversion, heterogeneity in talents, endogenous price formation of different specialisations, and competitive wage formation. We Þnd that in the absence of unemployment beneÞts, the percentage of individuals taking high-risk specialised education is ineffeciently low. Those with higher innate abilities are typically found to take lower degrees of specialisation, implying that the relation between wages and risks at the individual level is the reverse from what it is at the aggregate level. We Þnd that an unemployment beneÞt (UB) system raises efficiency and welfare because it promotes efficient specialisation. Because education takes time, it takes a long time before the composition of the workforce has adapted to changing incentives. With a calibrated model we explore such lags between unexpected changes in circumstances and outcomes.Child Allowances, Altruism, Exchange, Inter-Household, Intra-Household