Some economists have been puzzled recently by the fates and fortunes of college graduates. While the supply of them has been going up, employers are paying more for them.

• The Labor Department has projected that the growing number of college graduates could outstrip demand for them by as many as 330,000 annually by 2005.

• Yet the wage gap between high school and college graduates has continued to widen and recently has been as high as 60 percent to 70 percent.

These trends seemed inconsistent from an economic perspective. Frederic L. Pryor of Swarthmore College and David Schaffer of Haverford College looked into the matter in the latest issue of Monthly Labor Review.

They found it was not just possession of a college degree that determined a graduate's employment or salary -- but his or her functional literacy:

• Analyzing data from several surveys, they found that grads with superior reading, writing and mathematical skills are in short supply and can command high salaries.

• Since the early 1970s, the average real wages of this group have risen by 20 percent to 25 percent.

• Those who graduate with low levels of "functional literacy," on the other hand, often wind up with high school level jobs and experience either wage stagnation or declining real wages.

"Many college graduates," Pryor says, "simply lack the reading, writing and mathematical skills to solve problems that are supposed to go with a college education." He says that a shortage of qualified college graduates is real," but that the key word is 'qualified.'