Labor Market Search and Schooling Investment

We generalize the standard search, matching, and bargaining framework to allow individuals to acquire productivity-enhancing schooling prior to labor market entry. As is wellknown, search frictions and weakness in bargaining position contribute to under-investment from an efficiency perspective. In order to evaluate the sensitivity of schooling investments to “hold up,” the model is estimated using Current Population Survey data. We focus on the impact of bargaining power on schooling investment, and find that the effects are large in the partial equilibrium version of the model. However, large increases in bargaining power in the general equilibrium version of the model choke off firm vacancy creation and actually reduce the level of schooling investment.