The Rising College Premium in the Eighties: Return to College or Return to Unobserved Ability?
The changes in the distribution of earnings during the 1980s have been studied extensively. The two most striking characteristics of the decade are (a) a large increase in the college/high school wage gap, and (b) a substantial rise in the variance of wage residuals. While this second phenomenon is typically implicitly attributed to an increase in the demand for unobserved skill, most work in this area fails to acknowledge that this same increase in demand for unobserved skill could drive the evolution of the measured college premium. In its simplest form, if higher ability individuals are more likely to attend college, then the increase in the college wage premium may be due to a increase in the relative demand for high ability workers rather than an increase in the demand for skills accumulated in college. This paper develops and estimates a dynamic programming selection model in order to investigate the plausibility of this explanation. The results are highly suggestive that an increase in the demand for unobserved ability could play a major role in the growing college premium. Copyright 2001 by The Review of Economic Studies Limited
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Volume (Year): 68 (2001)
Issue (Month): 3 (July)
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