Labor market and Schooling Choice: Italy vs US (original) (raw)

The aim of this paper is to study the effect of labor market institutions on schooling choice. I introduce college decision in a search on-the-job model, where wage offers distribution depends on workers' innate ability and schooling level. The interaction between workers' heterogenous abilities and labor market structure endogenously determine both college wage premium and college decisions. As in the classical search on-the-job model, higher labor mobility and higher wage dispersion increase workers' probability to reach the right tail of the wage distribution. This provide agents with a larger incentive to shift wage distribution to the right by attending school. The model fits US and Italian data, two countries that present wide differences in educational achievements. Specifically, the US presents a larger college premium, higher enrollment and graduation rates in college. I find that the labor markets in US and Italy differ significantly in two dimensions. The US is characterized by i) higher job mobility and ii)higher return of innate ability. The former accounts for around 30% of the different enrollment and graduation rates. The latter rises the observed college premium in US above Italy, despite the effect of schooling on wage being higher in Italy, and can account for almost 50% of differences in educational attainment.