Despite the future benefits from investment in education predicted by theory, Albanian participation rates in upper secondary schooling have fallen since 1990. This reduction in post-compulsory schooling seems to be unique amongst transition economies. The theoretical framework developed in this thesis suggests this is the consequence of a high unemployment/low skill/bad job equilibrium. We argue that a major cause of this situation is the large agricultural sector in the Albanian economy. We provide insights into the causes of the previously neglected ‘bad'' equilibrium from an empirical analysis of the returns to education, using OLS and Logit/Probit estimation techniques. The theoretical platform supports the disjunctions between sectors in the labour market related to urban and rural localities. Wage returns to post-compulsory secondary education are low or not significantly different from zero in rural areas (for males). The earnings premia for tertiary education are generally higher and in urban areas comparable to those found in other transition economies.