Education Policies, Pre-College Human Capital Investment and Educated Unemployment

This paper employs a search and matching model featuring endogenous pre-college human capital investment to examine how education policies, such as subsidies, scholarships, and college capacity expansion, can affect individuals’ pre-college human capital investment, the college admission threshold and the unemployment rate of the educated. We explicitly model the college admission rule: each individual applies to college by sending her signal to the college. The college determines the admission threshold based on the distribution of signals and its capacity. Only those who send signals above the threshold will be admitted. Because the quality of signals depends on one’s pre-college human capital level, individuals are motivated to invest in pre-college human capital to compete for college admissions. We show that different education policies can deliver contrasting results. There are conditions under which education subsidies and scholarships can increase pre-college human capital investment and lower the unemployment rate of college graduates, while an expansion in the college capacity can yield opposite effects.