Higher Education Quality, Opportunity Costs and Labor Market Outcomes

This paper studies educational choices in a signaling setting in segmented labor markets. We show that in the presence of heterogeneous working ability imperfectly correlated with schooling costs, equilibria characterized by overeducation may arise. The quality of education is crucial in determining the extent of this phenomenon conditional on labor market features. To find evidence of the main implications of the model we use data of Italian graduates merged with the CIVR data set and disaggregated by geographical areas. We find that overeducation is strongly determined by university quality and by other variables that characterize the individual's socioeconomic background. In particular, the impact of education quality on educational mismatch appears to be higher in less developed areas.