Schooling Investment in Frictional Labor Markets
25 Pages Posted: 22 Sep 2015 Last revised: 18 Apr 2019
Date Written: April 17, 2019
This paper studies how and to what extent labor market friction affects individuals' schooling decisions. High job-finding rates and low job separation rates encourage schooling investment by extending the expected duration for exploiting the accumulated human capital. High job-to-job transition rates, however, discourage it by increasing the opportunity cost of college enrollment and reducing returns to schooling, measured by the average wage gap between the high school, and university, graduates. Our calibrated model, based on the US labor market data, indicates that the market equilibrium results in over-investment on schooling compared to the efficiency benchmark, due to high expected returns.
Keywords: Labor Market Friction, Schooling Decisions, Returns to Higher Education, Opportunity Cost of Higher Education
JEL Classification: E24, I21, J24, J31, J62
Suggested Citation: Suggested Citation