Formal Education Versus Learning-by-Doing

Abstract

This paper studies the efficiency of educational choices in a search-matching model where individuals face a tradeoff between acquiring formal education and learning-by-doing while on-the-job. The labor market is hierarchically segmented into two sectors. When their educational effort is successful, (educated) workers can directly obtain a high-skill / better-paying job; whereas when their effort is unsuccessful, uneducated workers must begin with a low-skill job, learn-by-doing and then search while on-the-job for a high-skill job. We state that low-skill firms suffer from a hold-up behavior by high-skill firms. As a consequence, the low-skill sector is insufficiently attractive and individuals devote too much effort to formal education. A self-financed tax and subsidy policy restores market efficiency.

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