Abstract:

The paper addresses the well documented European overeducation problem from a theoretical standpoint. Extraoptimal levels of education for the purposes of signaling on the labour market lead to short-term frictional problems of human capital allocation. Consequently, this paper is devoted to establishing an applied theoretical framework on the feasibility of separating equilibria in job markets. I show, using simple game and contract theoretical tools that even in relatively undistorted markets, achieving separation is not always possible. Even though much of the empirical literature from the field points to education being a normal good, I show that this is not necessarily the case. Tuition fee waivers to those in financial need is in most cases not compatible with the separation of workers. Applying a rent extraction problem to optimal candidate screening and migration, I prove that public policy is not aimed at implementing separating equilibria.

Keywords:

Job market signaling, human capital allocation, education, separating equilibria, tuition fee waivers, migration, candidate screening.