Higher education expansion and unskilled labour market outcomes

• The paper estimates the effects of university expansion on unskilled labour market outcomes.
• The policy reduces the probability of being inactive in the labour market.
• Observable characteristics indicate that those who enrol are individuals with a low opportunity cost.
• Labour market effects are consistent with the human capital hypothesis.

The increasing demand for higher education reduces the supply and changes the composition of unskilled secondary school graduates, and it may therefore affect their labour market outcomes. However, there is little empirical evidence on these effects. This paper analyses a large-scale expansion of higher education supply in Italy, which occurred at the end of the 1990s, to estimate the effects of the policy on the secondary school graduates’ probability of being inactive, employed, unemployed, and on their wages. Robust difference-in-differences estimates show that the probability of being inactive decreases by 4.5 percent, as the policy significantly displaces individuals from inactivity. Those shifting across educational level have middle ability but favourable parental background, and would have worked in the family firm, or waited for a public competition had the expansion not took place, indicating that a new campus nearby induces mainly those with a low opportunity cost to enrol in university. Lack of significant effects on the labour market outcomes of the workforce provides evidence in favour of the human capital hypothesis. However, the policy may have induced too little variation in the workforce to distinguish between the human capital and signalling theory.