Three essays on unemployment, self-selection and wage differentials

Abstract

This thesis is a collection of three essays on labor economics from a macroeconomic prospective. Chapter 1 discusses imperfect information, self-selection and the market for higher education. It explores how the steady trends in increased tuition costs, college enrollment and returns to education might be related to the quality of college graduates. The model shows that the signaling role of education might be an important, yet largely neglected ingredient in these recent changes. In a special signaling model, workers face the same costs, but can expect different returns from college. Allocation of ability into skill is determined by the equilibrium skill premium. Incorporating a production of higher education, the properties of the college market equilibrium are discussed. A skill biased technical change initially decreases self-selection into college, but the general equilibrium effect can overturn the initial decline, since increased enrollment and rising tuition costs increase selection. Higher initial human capital has an external effect on subsequent investment: all agents increase their schooling investment, and the higher equilibrium tuition costs increase self-selection and the college premium. Chapter 2 is about unemployment insurance and the uninsured.

(cont.) Under Federal-State law workers who quit a job are not entitled to unemployment insurance. How does the existence of the uninsured affect wages and employment? An equilibrium search model is extended to account for two types of unemployed workers. In addition to the unemployed who are currently receiving unemployment benefits and for whom an increase in unemployment benefits reduces the incentive to work, there are also unemployed who are currently not insured. For these, work provides an added value in the form of future eligibility, and an increase in unemployment benefits increases their willingness to work. Incorporating both types into a search model permits solving analytically for the endogenous wage dispersion and insurance rate in the economy. It is shown that in general equilibrium, when firms adjust their job creation margin, the wage dispersion is reduced and the overall effect of benefits can be signed: higher unemployment benefits increase average wages and decrease the vacancy-to-unemployment ratio. Chapter 3 explores the optimal provision of unemployment insurance within a search model. Adding risk aversion to the standard search and matching model allows for an analytic discussion of the optimal provision of unemployment insurance.

(cont.) The government's capacity to insure workers is limited by the market wage setting, which gives workers a share in the employment surplus. When the government provides higher unemployment benefits, the bargained wages increase, and unemployment rises. These equilibrium responses have a negative effect on workers' welfare if workers' bargaining power is above a certain point, which is lower than the matching elasticity. As risk aversion increases, workers' share in the wage bargain is smaller, and thus the equilibrium effects are attenuated. The constrained optimal provision of unemployment benefits is a modification of the Hosios condition for efficient unemployment insurance and highlights the roles of bargaining and risk aversion. The optimal level of insurance increases with risk aversion, with the costs of creating a vacancy and with workers' higher bargaining power.