Optimal higher education enrollment and productivity externalities in a two-sector model

We analyze the optimal share of the skilled workforce over the course of development with two sectors using skilled and unskilled labor respectively, and technological spillovers from higher education enrollment. Productivity in each sector depends on the average quality of workers and the size of the workforce. When skill-biased technological change prevails, this structure of externalities coupled with the endogenous ability sorting of workers may well produce a pattern of overenrollment in early and late stages of development and underenrollment in between. Our normative analysis is followed by a positive analysis exploring how policy would differ under alternative political objectives.