Abstract: There is evidence that rising overeducation has coincided with rapid skill-biased technical change (SBTC). This paper shows that a SBTC can cause a rise in overeducation as firms looking for educated workers become more selective and turn down the less skilled candidates. This result, while consistent with the evidence, is in contrast with the implications of recent search and matching models of the labor market. Here we present a model of a segmented labor market, with imperfect correlation between the individual ability and observed education of workers, and a fixed cost of setting up a job. A numerical example for the U.S. labor market in the period 1970-90 demonstrates that overeducation rises and that it can in turn be significant for the response of unemployment rates and wage inequality to a SBTC.

B.E. Journal of Macroeconomics 2013; 13(1): 1–18 download