Unemployment benefits, job protection, and the nature of educational investment

• We examine a matching model of unemployment with educational investment.
• Education determines the scope (or adaptability) and intensity of human capital.
• Match surplus and the return to adaptability skills are positively related.
• Unemployment benefits and dismissal costs reduce match surplus.
• Covering the risk of unemployment makes human capital more specialized.

This paper examines the impact of labor market institutions covering the risk of unemployment on the nature of educational investment. We offer a matching model of unemployment in which individuals of a given education determine the scope (or adaptability) and intensity (or productivity) of their human capital before entering the labor market. Our model features an increasing relationship between match surplus and the return to adaptability skills. This relationship explains why matching frictions promote adaptability skills instead of productivity skills, and why unemployment benefits and job protection create the incentive for productivity skill acquisition.