Schooling Investment, Mismatch, and Wage Inequality

50 Pages Posted: 19 Jul 2019

See all articles by Andrew Shephard

Andrew Shephard

University of Pennsylvania

Modibo Sidibe

Duke University

Date Written: July 17, 2019


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

JEL Classification: I22, I24, I26, J6, J21, J23, J24, J31, J64

Suggested Citation

Shephard, Andrew and Sidibe, Modibo, Schooling Investment, Mismatch, and Wage Inequality (July 17, 2019). PIER Working Paper No. 19-013, July 2019, Available at SSRN: or

Andrew Shephard (Contact Author)

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

Modibo Sidibe

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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