Inefficient self-selection into education and wage inequality

This paper proposes a theoretical framework where within graduates wage inequality is related to overeducation/educational mismatch in the labor market. We show that wage inequality may arise because of inefficient self-selection into education in the presence of ability-complementary technological progress and asymmetric information on individuals’ ability. In this setting, a crucial role is played by educational quality since it determines the signaling mechanisms in the labor market. We report some empirical evidence on the impact of mismatch, individual ability, family background, and university features on wages of Italian graduates and we suggest the importance of considering education quality as a policy instrument for reducing educational mismatch and wage inequality.

► A theory relating within graduates wage inequality and educational mismatch is presented. ► Wage inequality and mismatch arise because of inefficient self-selection into education. ► Education quality shapes signaling mechanisms in the labor market and affects educational choices. ► Empirical evidence on the impact of mismatch, individual ability, and university features on wages is reported. ► Policy improving education quality may reduce mismatch and wage inequality.