Human Capital and Employment Risks Hedging

Both educational expenditures and attainment have increased sharply over the last decades, despite rising prices of education, and stagnating income returns to human capital. This paper emphasizes conditional employment risks hedging as additional motivation for education demand. Job risk diversification through education is strongly evidenced in the data, yet is absent from the Human Capital (HC) literature, whereas agents’ dynamic household choices are not considered in standard unemployment Search and Matching models. A benchmark HC model is thus modified to allow for lower job displacement risk, and higher re-employment probability, in addition to higher income for the better educated. Numerical solutions for optimal dynamic investment in human capital are consistent with observed patterns, such as unemployment duration dependence (stigma), post-reemployment income loss (scarring), and cyclical patterns in education expenditures. The effects of permanent shifts affecting human capital returns in employment risks hedging, and income returns are investigated and shown to be consistent with rising educational expenditures and attainment. Keywords— Demand for education; unemployment duration dependence; unemployment stigma; income scarring; work displacement; re-employment probability. JEL classification— I26, J24, J64, J65