Schooling Investment, Mismatch,and Wage Inequality

Andrew Shephard and Modibo Sidibe
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Modibo Sidibe: Department of Economics, Duke University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper examines how policies, aimed at increasing the supply of education in the economy, affect the matching between workers and firms, and the wages of various skill groups. We build an equilibrium model where workers endogenously invest in education, while firms direct their technology toward skill intensive production activities. Search frictions induce mismatch on both extensive (unemployment) and intensive (over-education) margins, with ensuing wage consequences. We estimate the model using NLSY and O*NET data, and propose an ex-ante evaluation of prominent educational policies. We find that higher education cost subsidies boost college attainment, produce substantial welfare gains in general equilibrium, but increase wage inequality. These changes are associated with a substantial upward shift in the distribution of job complexity, which leads to worse allocations for high-school graduates who end up under-educated in less productive firms, while highly-educated workers match with more productive firms and experience less over-education during their careers.

Keywords: Human capital; education policy; wage inequality; job search; technology choice; equilibrium (search for similar items in EconPapers)
JEL-codes: I22 I24 I26 J21 J23 J24 J31 J6 J64 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2019-07-17
New Economics Papers: this item is included in nep-dge, nep-edu, nep-lma and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:19-013

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