ACCUMULATION OF HUMAN-CAPITAL IN LDCS IN THE PRESENCE OF UNEMPLOYMENT

This paper takes up an aggregative growth framework to study how human and physical capital evolve over time as households allocate their investment between the two assets. In the context of unemployment or educated labour, it develops a general equilibrium model of an economy with two sectors: a composite good sector and a schooling sector where output is subject to increasing returns to scale. A temporary equilibrium for this economy depends on the endowments of physical and human capital as well as on the output elasticity of returns to scale and the price elasticity of education. The dynamic evolution of this economy is explored in terms of the accumulation of the two types of capital. A rise in education subsidy increases the demand for education at the cost of investment in physical capital and could lead to inefficient substitution between skilled and unskilled workers in the long run.