An economic analysis of education externalities in the matching process of UK regions (1992-99)

This paper studies the existence and the scale of education externalities in the unemployment durations su ered by workers in the UK. First, we develop a theoretical model. Using a matching framework we show that a rise in the average level of education of a labour market will a ect unemployment durations in two di erent ways. It will increase the firms¿ expected profits per vacancy opened, since firms expect to be matched with a more qualified worker, rising job creation and reducing unemployment durations. We call this the Composition or External e ect. But, since more qualified workers are more e cient in the process of job search, it will also rise the competition amongst workers for opened vacancies, increasing unemployment durations. We name this the Competition e ect. In the most skilled segments of the labour market the composition e ect will dominate the competition e ect, while in the least skilled segments the opposite will be true. Then, we test these theoretical results empirically using data from the UK Labour Force Survey for the 17 UK regions over the period 1992Q1-99Q4. We find that a 1% rise in the average level of education reduces unemployment durations of individuals from skilled occupations by 2.9% on average, while it rises the unemployment durations of individuals from unskilled occupations by 1.9% on average. This e ect is robust to di erent measures of education, to controlling for unobserved heterogeneity and to di erent parameterisations of the hazard functio