Dual labor market hypothesis and long-run income distribution

Abstract

We construct a dynamic model of dual labor market, incorporating firm investment behavior and household investment behavior on education. Education enhances the trainability of individuals and thus provides qualifications for entry into the primary market. Two specifications of the model, differing in the nature of the new entrants' market, are presented; one admitting competitive adjustment in the scarcity premium of qualified entrants, while the other, a generalization of Thurow's job competition model, allocates employment through rationing. We obtain sharply different long-run determinants of income distribution between these alternative models. The result extends and qualifies existing interpretations on the schooling paradox observed in the U.S.