Human Investment Decisions, Labor Market Choice, and Unemployment.

by Gary S. Fields, James Hosek

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This paper extends human investment analysis to a world in which unemployment arises stochastically. The model presented emphasizes that labor market choice, job search strategy, and skill investment should be viewed as simultaneous decisions by the ex ante decisionmaker. The returns to skill investment depend on which market is chosen and how one chooses the advance up the wage ladder, and conversely. An explicit analytical solution is derived to the question of whether an unemployed person of given skill in a given labor market should accept only high wage offers, or accept a lower offer if one is forthcoming and then search on the job. This decision is analogous to determining an optimal acceptance wage, with an important difference: the optimal acceptance wage in the model is itself directly dependent on choice of search strategy. The model also provides a basis for analyzing the labor market adjustment via nonwage factors. 33 pp. Ref.

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