Economic Policy in a Growth Model with Human Capital, Heterogenous Agents and Unemployment

In this paper we present an endogenous growth model with human capital, heterogenous agents and unemployment. Two types of households are considered. One household acquires human capital or skills through education while the other household remains low-skilled. Sustained growth is the result of human capital accumulation which is a function of the existing human capital employed in the educational sector and of public spending for teaching materials. Both households are affected by unemployment and, if so, receive unemployment benefits. The government levies an income tax and uses its revenues to pay unemployment benefits, to finance transfers to the low-skilled household and to finance human capital accumulation. The paper studies growth and welfare effects of economic policy and presents a stability analysis of the model.