Staying on the Dole

V(h, 0)' = δτ(1 -θ) + δτ(1 -θ) > V(h,τ) = δτ(1 -θ)b + δτ(1 -θ)(1 -d) > V(h,T) = δτ(1 -θ)b.

(6)

Thus, in a V - h diagram, life-time income intersects in three points yielding critical levels of
human capital.² These intersections are calculated from (1’) - (3’):

hA _ ^δτ [^s + ^{(1 - θ})^λτ] ^- e ^{[(1 - θ})^δT ^- c]

h =          δτ (1 - θ)(1 - d)

hB _ ^{(1 - θ}) [^δτ^λ0 + ^δT^λτ^] + ^sδT

=   (1 - θ)[δτ (1 - b)+ δτ ]

hC _ ^δτ^{(1 - θ})^λ0 + e ^{[(1 - θ})^δT ^- c^]

h =    (1 - θ) [δτ (1 - b) + δτd]     .

We call the intersection between V(h, τ) and V(h, T) point A, the intersection between V(h, 0)
and V(h, T) point B, and the intersection between V(h, 0) and V(h, τ) point C (see Figure 1).

Figure 1: Career Decision Diagram

_{LTU                 STU}                  Employed

²It is also possible according to (6) that it is never optimal to be STU. This degenerate case is discussed in the
Appendix.

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