NCPA - National Center for Policy Analysis


January 3, 2008

Simple supply and demand specifications do a remarkable job explaining the long-run evolution of the college wage premium, according to the authors of a National Bureau of Economic Research Working Paper.

Using a supply-demand framework, the authors find:

  • From 1915 to 1940, the relative demand for college graduates (those with 16 or more years of schooling) grew at an average rate of 2.16 to 2.41 percent per year.
  • But the supply of college-educated workers grew at an average 3.19 percent annually during the same period.
  • Not surprisingly, the wage premium for college graduates over high school graduates narrowed dramatically during the period.

Starting in 1980, the supply-demand picture flipped, the authors say:

  • The rise in the supply of college-educated workers slowed to 2.00 percent per year while demand increased to somewhere between 3.27 to 3.66 percent per year.
  • That's a major reason behind the rise in the premium back to the levels of 1915.

The authors also examine what role immigration has played in the fall and rise of the college wage premium since 1890. Since immigrants have tended to swell the ranks of less-educated workers, especially during the initial and latter parts of that period, their influx has had an impact.  But "immigration had a far smaller effect on relative skill supplies in all periods we examine than is generally presumed and thus it had a smaller impact on changes in the premium to education than is often asserted," the authors argue.

Source: Laurent Belsie, "The Rise and Fall of the College Graduate Wage Premium," NBER Digest, January 2008.

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