THE INTERACTION BETWEEN UNEMPLOYMENT INSURANCE AND HUMAN CAPITAL POLICIES

In the presence of an optimally designed unemployment bene.t system we show that it is optimal for the government to encourage human capital acquisition. The driving force of this result is the complementarity between human capital and labor-market- oriented behavior. If policy includes inter-temporal transfers, the optimal level of investment in human capital is given at the point where, at the margin, expected return to human capital is identical to the risk free rate even though there is no full insurance at the optimum.