Subsidizing education by taxing wage versus subsidizing wage by taxing education: which pro-employment policy matters?

A belief that a better-trained workforce will enhance employability of workers at the individual level and thus reduce unemployment at the agregate level is commonly held. Nevertheless, in spite of massive public resources devoted to the education sector in developing countries, unemployment rates still strongly hit the most educated populations. This article develops a simple and tractable neoclassical model that shows how unemployment and human capital investment are related to each other. It also compares the consequences on employment of two pro-employment policies, namely, subsidizing education by taxing wage versus subsidizing wage by taxing education. The results suggest, contrary to the common belief, a negative relation between employment rate and human capital investment and show that education should be taxed rather than subsidized.