Interaction between Labor Market Conditions and Educational Investment.

Abstract

We consider a two-period model in which an informed worker may invest in education in the first period, in which case she will not participate in the labor market in that period, but her diploma will allow her to signal a greater productivity in the second period. In this setting, we analyze the effects of a change in the labor market conditions on the worker´s educational decision. In a selective educational system wherein the rate at which the cost of education decreases with the worker´s productivity is sufficiently high, we found that the worker´s incentives to invest in education become stronger when the worker is more patient, when the expected future wage is greater, or when the cost of education is lower. Interestingly, the opposite occurs in a nonselective educational setting wherein the rate at which the cost of education decreases with the worker´s productivity is sufficiently low. Those results are robust to the worker´s risk preferences and to the specification of the prior distribution function of worker´s productivities.