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In a number of European countries, unemployment rates for young college graduates
are higher than for young high school graduates. This presents a challenge for canon-
ical models of unemployment that suggest that unemployment should decrease with
education. I disentangle two potential explanations for the pattern: “labor market fric-
tions” versus “relative productivity.” Here, labor market frictions are obstacles to labor
market flows (such as employment protection regulation), whereas relative productivity
refers to features that lower the output of educated workers already matched to firms
(such as an education system that does not provide the right skills or a lack of jobs that
make good use of workers' skills). The analysis builds on a search and matching model
with endogeneous productivity differences and the possibility of mismatch (educated
workers working in low skilled jobs). I show that when young educated workers have
productivity levels close to uneducated workers, they have higher unemployment rates,
because firms create fewer skilled jobs. My counterfactual analysis shows that the rel-
ative productivity channel is more important than the labor market frictions channel
in accounting for unemployment of young educated workers. The results suggest that
improving education policy and fostering firms' demand for skills may have important
roles to play in addressing high unemployment among young workers.
