Over-education for the rich, under-education for the poor: a search-theoretic microfoundation

This paper studies the efficiency of educational choices in a two sector/two schooling level matching model of the labour market where a continuum of heterogenous workers allocates itself between sectors depending on their decision to invest in education. Individuals differ in ability and schooling cost, the search market is segmented by education, and there is free entry of new firms in each sector. Self-selection in education originates composition effects in the distribution of skills across sectors. This in turn modifies the intensity of job creation, implying the private and social returns to schooling always differ. Provided that ability and schooling cost are not too positively correlated, agents with large schooling costs — the ‘poor’ — select themselves too much, while there is too little self-selection among the low schooling cost individuals — the ‘rich’. We also show that education should be more taxed than subsidized when the Hosios condition holds.