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Search Equilibrium, Production Parameters and Social Returns to Education: Theory and Estimation

  • Holzner, Christian

    ()

    (Ifo Institute for Economic Research)

  • Launov, Andrey

    ()

    (University of Mainz)

We introduce different skill groups and production functions into the Burdett-Mortensen equilibrium search model. Supermodularity in the production process leads to a positive intrafirm wage correlation between skill groups. Theory implies that increasing returns to scale can lead to a unimodal earnings density with a decreasing right tail even in the absence of productivity dispersion. Our empirical results indicate economy-wide increasing returns to scale. We use the structural estimates of the production parameters to investigate whether private returns to education equal social returns. Our estimates suggest a positive welfare effect from increasing the share of medium-skilled agents in the workforce.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1904.

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Length: 46 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1904
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  11. Audra J. Bowlus & Zvi Eckstein, 1998. "Discrimination and Skill Differences in an Equilibrium Search Model," UWO Department of Economics Working Papers 9802, University of Western Ontario, Department of Economics.
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  15. Masters, Adrian M, 1998. "Efficiency of Investment in Human and Physical Capital in a Model of Bilateral Search and Bargaining," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 477-94, May.
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  22. Bontemps, Christian & Robin, Jean-Marc & Van den Berg, Gerard J, 1999. "An Empirical Equilibrium Job Search Model with Search on the Job and Heterogeneous Workers and Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 1039-74, November.
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