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201166 https://hdl.handle.net/2286/R.2.N.201166 http://rightsstatements.org/vocab/InC/1.0/ All Rights Reserved 2025 180 pages Doctoral Dissertation Academic theses en Sarikaya, Furkan Ventura, Gustavo Vereshchagina, Galina Ferraro, Domenico Arizona State University Partial requirement for: Ph.D., Arizona State University, 2025 Field of study: Economics This dissertation consists of two chapters examining skill formation in the macroeconomy. First, I study the macroeconomic implications of college major choices in the context of a frictional labor market framework. I develop an equilibrium search model with two-sided multidimensional heterogeneity in the labor market and endogenous college and major decisions. In the model, individuals are initially sorted into college majors based on their multidimensional abilities (math, verbal, and social) and preferences, which leads to differential human capital accumulation by major across these dimensions. Firms are heterogeneous in their job requirements and create jobs endogenously. I calibrate the model using data from the NLSY79 and O*NET. I use the model to evaluate the role of college subsidies in mitigating inefficiencies arising from labor market frictions. The expenditure-neutral, welfare-maximizing subsidy scheme—which allows for differential subsidies across majors while maintaining fixed total subsidy costs—leads to a 0.5% increase in overall welfare. This policy also results in a 35% increase in the number of Science and Engineering graduates. General equilibrium effects are significant, with about one-third of output gains in the welfare-maximizing economy driven by improved job creation and reduced worker-job mismatch. These findings stand in contrast with the current practice, where higher education subsidies are largely distributed without differentiating by college major. The second chapter examines the interaction between incomplete tax enforcement and managerial skills. Using establishment-level World Bank Enterprise Surveys, I document the following trends (i) the average tax noncompliance rate, defined as the ratio of unreported sales to total sales, decreases with GDP per worker, (ii) the tax noncompliance rate is size-dependent, i.e., small establishments conceal a higher fraction of their sales than large establishments, (iii) the level of this size-dependency diminishes as GDP per worker increases. To examine the implications of these findings for managerial quality and aggregate output, I develop a modified version of Lucas(1978) span-of-control model in which managers invest in their managerial skills and choose how much of their income to report to the government after considering the risk of getting inspected by tax officials. The results reveal that incomplete tax enforcement significantly diminishes economy-wide managerial quality, with the magnitude of this impact escalating with the level of size-dependency in tax noncompliance. For instance, transitioning from the benchmark economy, calibrated to U.S. data, to an economy similar to Brazil’s tax enforcement regime leads to an approximate 23% reduction in average managerial quality and roughly a 3% decrease in output. Economics ability selection college major choice Equilibrium higher education subsidies job search Essays on Skill Formation in the Macroeconomy