Why Did College Wage Premium Growth Slow Down? An Analysis with Endogenous Supply of College Workers

Abstract

We look into the reasons for the significant deceleration of college wage premium growth since 2000 with a planner decision model in which the supply of college workers is endogenously determined. By counterfactual simulations, we find that: (1) the slower skill-biased technological change and faster skill-neutral productivity progress in both routine and manual task occupations account for two-third of the deceleration; (2) the slower skill-biased technological change in cognitive task occupations only explains less than one-tenth of the deceleration prior 2014; (3) the change in cost shifter of college worker supply attributes about a quarter of the deceleration. Furthermore, we show that the decline in college workers’ mean quality is a mechanism with a moderate impact on the deceleration. Our findings suggest that even the overall technological change was becoming more biased in favor of skills, the average college wage premium growth could still slow down. Also, if the demand reversal and automation in non-cognitive task occupations are the necessary directions of technological change, then the deceleration is somewhat an inevitable outcome of technological progress.

Keywords: college wage premium, deceleration, endogeneous supply, technological change

JEL Classification: E24, J24, J31