Unemployment, labor market segmentation, the opportunity cost of labor and the social returns to education

Examines the discrepancy between observed market wages and the true marginal product of labor classified by schooling in an urban economy characterized by: (a) labor classified by schooling are different inputs from a technological point of view; (b) for each type of labor a free entry labor market (where the wage clears the market) coexists with a restricted entry or protected labor market (where the wage rate is above the equilibrium level); and (c) unemployment of labor is observed. Given (b) such unemployment is a result of a rational process of choice between alternative employment plans involving job search. The findings are that such discrepancy is fairly constant under reasonable variations of the basic parameters except for the demand elasticity for labor. For a wide range such elasticity, the use of observed wages in the unprotected sector to measure the true contribution of each type of labor represents an upper bound. Nevertheless, the use of the free entry sector relative wages to assess the true relative contribution of labor classified by schooling involves a lesser degree of error.