An economic analysis of education externalities in the matching process of UK regions (1992-99)

This paper studies the existence and the scale of education externalities in the unemployment durations suffered by workers in the UK. First, we develop a theoretical model. Using a matching framework we show that a rise in the average level of education of a labour market will affect unemployment durations in two different ways. It will increase the firms' expected profits per vacancy opened, since firms expect to be matched with a more qualified worker, rising job creation and reducing unemployment durations. We call this the Composition or External effect. But, since more qualified workers are more efficient in the process of job search, it will also rise the competition amongst workers for opened vacancies, increasing unemployment durations. We name this the Competition effect. In the most skilled segments of the labour market the composition effect will dominate the competition effect, while in the least skilled segments the opposite will be true. Then, we test these theoretical results empirically using data from the UK Labour Force Survey for the 17 UK regions over the period 1992Q1-99Q4. We find that a 1% rise in the average level of education reduces unemployment durations of individuals from skilled occupations by 2.9% on average, while it rises the unemployment durations of individuals from unskilled occupations by 1.9% on average. This effect is robust to different measures of education, to controlling for unobserved heterogeneity and to different parameterisations of the hazard function.