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Changes in Relative Ability as a Determinant of the U.S. College Premium

Author

Listed:
  • Darius Martin

    (American University of Beirut, Lebanon)

  • Yongli Zhang

    (Central University of Finance and Economics, Beijing, China)

Abstract

We develop a macroeconomic framework to estimate the importance of fluctuations in relative ability in accounting for trends in the college premium in the United States since 1965. The theoretical scaffolding is a heterogeneous agent model with two dimensions of ability and endogenous schooling choice, with exogenous skill-biased technological change (SBTC), college tuition, and noneconomic social forces. We solve for conditions under which SBTC reduces the relative ability of college educated workers, and show that these conditions are met in the data. We attribute the drop in the college premium over the 1970s to a 25.5% drop in the mean relative quality of college-educated workers from 1968 to 1977. We find that SBTC explains about two thirds of the increase in college attendance since 1965, and that absent both supply shifts and a supply response to SBTC, the relative wage of highly educated workers would have been 77.1% larger in 2013.

Suggested Citation

  • Darius Martin & Yongli Zhang, 2015. "Changes in Relative Ability as a Determinant of the U.S. College Premium," Review of Economic Analysis, Rimini Centre for Economic Analysis, vol. 7(1), pages 84-110, June.
  • Handle: RePEc:ren:journl:v:7:y:2015:i:1:p:84-110
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    More about this item

    Keywords

    College Premium; Self-Selection; Human Capital;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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