Formal Education Versus Learning-by-Doing
39 Pages Posted: 2 Aug 2014
The efficiency of educational choices is studied in a search-matching model where individuals face a tradeoff: acquiring formal education or learning while on the job. When their education effort is successful, newcomers directly obtain a high-skill job; otherwise, they begin with a low-skill job, learn-by-doing and then search while on-the-job for a high-skill job. Low-skill firms suffer from hold-up behavior by high-skill firms. The low-skill sector is insufficiently attractive and individuals devote too much effort to formal education. A self-financing tax and subsidy policy restores market efficiency.
Keywords: formal education, learning-by-doing, market efficiency, on-the-job search, search unemployment
JEL Classification: H21, I20, J21, J64, J68
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