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