Education, Job Signaling, and Dual Labor Markets in Developing Countries

An overlapping generational model of educational investment in a dual labor markets is presented in which education serves both as a screening device and as investment in human capital. Labor market dualism arises not only via the conventional technology (productivity) differential between a primary and a secondary sector, but also by a higher than a labor market clearing wage in the primary sector, to insure no shirking by the workers (an element shared with the efficiency wage theories). The important determinants of the workers' educational investment decision are the degree of discipline in the labor market and the cost of education. Among the three most commonly discussed educational policies of maximizing the number of the educated, maximizing the primary sector employment and maximizing social welfare, the last one, i.e., the most efficient one, leads to a lower level of education subsidy by the government