Labor Market Search and Schooling Investment1

We generalize the standard search, matching, and bargaining framework to allow individuals to acquire productivity-enhancing schooling prior to labor market entry. As is wellknown, search frictions and weakness in bargaining position contribute to under-investment from an efficiency perspective. However, in a model with vacancy creation on the part of firms, changes in the bargaining position of workers have an uncertain impact on the welfare of workers, and efficiency more generally. We estimate the model using data from the Survey of Income and Program Participation and utilize the estimates to evaluate the impact of minimum wages and schooling subsidies on welfare outcomes. While these policies improve welfare in the aggregate, they have very different impacts across the ability distribution and have limited beneficial effects for the least able.