The Phd Labor Market : Knowledge Accumulation, Subsidies, and Productivity Differentials

The PhD labor market is unique: only doctoral graduates can become professors. Moreover, professors and doctoral students both contribute to knowledge production, which has a spillover effect on labor productivity. However, pursuing a doctoral degree faces an opportunity cost of not working in industry and uncertainty in getting a faculty position. To capture these features, we develop an occupational choice model with overlapping and heterogeneous individuals who rationally choose to study abroad, enter domestic PhD programs, or work in industry. The model also highlights a productivity differential between professors who obtained a foreign and a domestic degree. Our quantitative analysis shows that slower population growth results in fewer doctoral students. To internalize the spillover effect, we analyze subsidies to students and professors, and show that the subsidy to domestic doctoral students is more effective in boosting the number of PhDs. Nevertheless, when the productivity differential is substantial, this subsidy does not necessarily improve the average welfare because it also reduces the share of professors who have higher productivity from overseas training