On-the-job search and optimal schooling under uncertainty and irreversibility
AbstractThis paper develops a labour market model with on-the-job search, match-specific productivity draws and an endogenous irreversible schooling decision. The choice of schooling is modelled as an optimal stopping problem which gives rise to the equilibrium heterogeneity of workers with respect to the formal education. The optimal schooling decision is characterized by the reservation productivity of students which is a monotonic function of time. Moreover, this reservation productivity is lower in expansions when job-to-job mobility is more intensive. Therefore, the model is compatible with the empirical evidence that expansions have a positive effect on the probability of a school dropout. The schooling density is downward-sloping and the equilibrium wage distribution is right-skewed with a unique interior mode. This means that the majority of workers earn wages in the middle range of the earnings distribution. At the same time there is a small proportion of employees in the beginning of their career with wages in the left tail of the earnings distribution and a small proportion of high-skilled workers earning wages in the right tail of the distribution.
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Bibliographic InfoPaper provided by Bielefeld University, Center for Mathematical Economics in its series Working Papers with number 492.
Length: 30 pages
Date of creation: Nov 2013
Date of revision:
Optimal schooling; uncertainty; on-the-job search; wage dispersion;
Find related papers by JEL classification:
- I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
- I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
- J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-06 (All new papers)
- NEP-DGE-2013-12-06 (Dynamic General Equilibrium)
- NEP-EDU-2013-12-06 (Education)
- NEP-HRM-2013-12-06 (Human Capital & Human Resource Management)
- NEP-LAB-2013-12-06 (Labour Economics)
- NEP-URE-2013-12-06 (Urban & Real Estate Economics)
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