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Higher Education Levels, Firm's Outside Options and the Wage Structure

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  • Wasmer, Etienne
  • Rosén, Ã…sa

Abstract

We analyse the consequences of an increase in the supply of highly educated workers on relative and real wages in a search model where wages are set by Nash-bargaining. The key insight is that an increase in the supply of highly educated workers improves the firms? outside option. As a consequence, the real wage of all workers decreases in the short-run. Since this decline is more pronounced for less educated workers, wage inequality increases. In the long-run a better educated work force induces firms to invest more in physical capital. Wage inequality and real wages of highly educated workers increase while real wages of less educated workers may decrease. These results are consistent with the US experience in the 70s and 80s. Based upon differences in legal employment protection we also provide an explanation for the diverging evolution of real and relative wages in Continental Europe.

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  • Wasmer, Etienne & Rosén, Ã…sa, 2002. "Higher Education Levels, Firm's Outside Options and the Wage Structure," CEPR Discussion Papers 3186, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3186
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    Cited by:

    1. Wasmer, Etienne, 2002. "Interpreting Europe and US labor markets differences: the specificity of human capital investments," Arbetsrapport 2003:9, Institute for Futures Studies.
    2. Tom Jagelka, 2017. "The Specificity of Human Capital Investment under Agent Heterogeneity and Market Frictions: Theory and Empirics," LIS Working papers 688, LIS Cross-National Data Center in Luxembourg.
    3. Trine Filges & Birthe Larsen, 2005. "Stick, Carrot and Skill Acquisition," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 495-519, September.
    4. Etienne Wasmer, 2006. "Interpreting Europe and US labor markets differences : the specificity of human capital investments," SciencePo Working papers hal-01021294, HAL.

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    More about this item

    Keywords

    Wage inequality; Matching; Creation costs; Firing costs;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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