Higher Education Quality, Opportunity Costs and Labor Market Outcomes

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