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India's Increasing Skill Premium: Role of Demand and Supply

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  • Azam Mehtabul

    ()
    (World Bank and Institute for the Study of Labor)

Abstract

Using micro data for India from 1983 to 2005, this paper finds that the tertiary (college)-secondary (high school) wage premium has been increasing in India over the past decade and that this increase differs across age groups. The increase in wage premiums has been driven mostly by younger age groups while older age groups have not experienced any significant increase. Using a demand and supply model with imperfect substitution across age groups (developed in Card and Lemieux, 2001), this paper demonstrates that workers are not perfect substitutes across age groups. The paper finds that the increase in the wage premium has come mostly from demand shifts in favor of workers with a tertiary education. More importantly, the growth rate of demand for tertiary educated workers relative to secondary educated workers was fairly stable in the 1980s and the 1990s. However, the relative supply played an important role not only in determining the extent of increase in wage premium, but also its timing. The increase in relative supply of tertiary workers during 1983-1993 negated the demand shift; as a result, the wage premium did not increase much. But during 1993-1999, the growth rate of the relative supply of tertiary workers decelerated, while relative supply became virtually stagnant during 1999-2004. Both these periods saw an increase in the wage premium as the countervailing supply shift was weak.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 10 (2010)
Issue (Month): 1 (October)
Pages: 1-28

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Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:94

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References

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  1. Daron Acemoglu, 2000. "Technical Change, Inequality, and the Labor Market," NBER Working Papers 7800, National Bureau of Economic Research, Inc.
  2. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  3. David Card & Thomas Lemieux, 2000. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," NBER Working Papers 7655, National Bureau of Economic Research, Inc.
  4. Gaurav Datt & Martin Ravallion, 2002. "Is India's Economic Growth Leaving the Poor Behind?," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 89-108, Summer.
  5. Pavcnik, Nina, 2003. "What explains skill upgrading in less developed countries?," Journal of Development Economics, Elsevier, vol. 71(2), pages 311-328, August.
  6. David Card & John E. DiNardo, 2002. "Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 733-783, October.
  7. Angus Deaton & Jean Dreze, 2002. "Poverty and Inequality in India: A Re-Examination," Working Papers 184, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  8. Kevin M. Murphy & W. Craig Riddell & Paul M. Romer, 1998. "Wages, Skills, and Technology in the United States and Canada," NBER Working Papers 6638, National Bureau of Economic Research, Inc.
  9. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  10. Marco Manacorda & Carolina Sanchez-Paramo & Norbert Schady, 2005. "Changes in Returns to Education in Latin America: the Role of Demand and Supply of Skills," CEP Discussion Papers dp0712, Centre for Economic Performance, LSE.
  11. Puja Vasudeva Dutta, 2005. "Accounting for Wage Inequality in India," PRUS Working Papers 29, Poverty Research Unit at Sussex, University of Sussex.
  12. Prachi Mishra & Utsav Kumar, 2005. "Trade Liberalization and Wage Inequality," IMF Working Papers 05/20, International Monetary Fund.
  13. Joshua D. Angrist, 1995. "Short-Run Demand for Palestinian Labor," Working papers 95-16, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Jorge Saba Arbache & Andy Dickerson & Francis Green, 2004. "Trade Liberalisation and Wages in Developing Countries," Economic Journal, Royal Economic Society, vol. 114(493), pages F73-F96, 02.
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Cited by:
  1. Vidya Atal & Kaushik Basu & John Gray & Travis Lee, 2010. "Literacy traps: Society-wide education and individual skill premia," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(1), pages 137-148.
  2. Beladi, Hamid & Marjit, Sugata & Weiher, Kenneth, 2011. "An analysis of the demand for skill in a growing economy," Economic Modelling, Elsevier, vol. 28(4), pages 1471-1474, July.
  3. Beretta, Silvio & Targetti Lenti, Renata, 2011. "“India in the Outsourcing/Offshoring Process: A Western Perspective” - L’India nel processo di outsourcing/offshoring: un punto di vista occidentale," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 64(3), pages 269-296.
  4. Azam, Mehtabul Azam & Blom, Andreas, 2008. "Progress in Participation in Tertiary Education in India from 1983 to 2004," Policy Research Working Paper Series 4793, The World Bank.

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