Equilibrium unemployment in the presence of different skill levels in two different regions: Mexico versus Egypt

Unemployment rates increase with the level of education of the group surveyed in several developing countries. The goal of this paper is to provide a theoretical framework to study the determinants of this phenomenon. The model I present uses unemployment as a punishment device to force workers to perform well at work. The crucial assumption is that more educated workers can perform tasks that do not require much education and they chose to do so in the absence of unemployment insurance. This makes the threat of unemployment less harsh for educated workers and forces employers to decrease demand of educated employees in order to increase the punishment for them. I argue that this is a reasonable assumption to make in the case of two specific cases: Mexico and Egypt. Copyright Springer-Verlag Berlin Heidelberg 2014