Unemployment, labor market segmentation, and the returns to educated labor

This paper addresses the following question: what is the (shadow) marginal product of labor classified by education and its relation to observed market wages when: (i) educated and non-educated labor are different inputs in the production function of the urban economy; (ii) unorganized or free entry labor markets for each skill coexist with restricted entry labor markets with wages above clearing levels; and (iii) unemployment of both types of labor is observed. The discrepancy between the marginal product of labor by education and the free entry wage is evaluated under two extreme typologies of urban labor markets. Such typologies are defined according to the relative size of the restricted-entry labor market, its education intensity, and the unemployment rate. The findings are that such discrepancy is fairly constant across typologies and basically a function of the demand elasticity for labor in the free entry sector. For a wide range of such elasticity, observed wages in the unprotected sector represent an upper bound for the true contribution of each labor. Nevertheless, those wages can be appropriately used for assessing the true relative contribution of labor classified by schooling.