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Skill level, Cognitive Ability, Unemployment and Welfare

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This paper examines the implications of that workers may not be ableto estimate their true costs of acquiring skills. Consequently, too fewworkers may acquire skills. This allows for the possibility that subsidizingeducation is welfare improving. Furthermore, if the presence of skill-biasedtechnological shocks increase unemployment, this may explain why themarket it-self cannot respond to this by making it sufficiently attractiveto acquire skills. Consequently, the trade-off in-between subsidizing educationand thereby reducing unemployment and optimizing welfare maybe eliminated. We analyse this issue in a simple educational model andnext in a search equilibrium model including a skill choice decision.Keywords: Education, subsidies, efficiency, unemployment.JEL codes: I20, J64.

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Birthe Larsen

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