Abstract

A relatively low tertiary education wage premium and a large occupational mismatch are two salient features of the Spanish labor market that distinguish it with respect to the labor markets in other developed countries. In this paper we provide an equilibrium model of the labor market with frictions in which workers are heterogeneous in terms of ability and education. We specifically model an education policy as delivering either a particular selection of individuals into the tertiary education system or a higher ability of individuals, or both. Our model economy is calibrated to mimic several of the Spanish labor market statistics together with key aspects of the achievement levels from the Programme for International Student Assessment (PISA) and the Programme for the International Assessment of Adult Competencies (PIIAC). We then explore the implications of alternative education policies on mismatch and tertiary education wage premium. We find that under an education policy able to produce ability levels of tertiary educated workers comparable to the average of the OECD countries a 40% lower fraction of mismatched workers and a 10% higher tertiary education wage premium would be observed in Spain.