Education as Unemployment Insurance: A Model with Endogenous Educational Requirement for Job Application and Its Policy Implications

This paper combines a search model and signaling game to analyze the interrelationship between labor market outcome and educational choices as well as relevant policy implications, featuring endogenous educational requirement for job application. It explains more than 60% of the unemployment rate difference between college and high school graduates. It predicts that higher unemployment benefit encourages individual to take education. It is also predicted that aggregate unemployment rate decreases if higher educational subsidy is provided, even though both skill-specific unemployment rates increase. Furthermore, according to this model, skill-biased technological change will increase the unemployment rate and lower the wages of uneducated workers. JEL classification: E24, H52, I21, J24, J64, J68