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

Author

Listed:
  • Asa Rosen
  • Etienne Wasmer

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

We analyze the consequences of an increase in the supply of highlyeducated workers on relative and real wages in a search model where wages are setby Nash bargaining. A key insight is that an increase in the average education levelexerts a negative externality on wages through its positive externality on the firms'outside option. As a consequence, the real wage of all workers decreases in theshort run. Since this decline is more pronounced for less educated workers, wageinequality increases. In the long-run a better educated work force induces firms toinvest more in physical capital. Wage inequality and real wages of highly educatedworkers increase while real wages of less educated workers may decrease. Theseresults are consistent with the US experience in the 1970s and 1980s. Based upondifferences in legal employment protection we also provide an explanation for thediverging evolution of real and relative wages in Continental Europe.

Suggested Citation

  • Asa Rosen & Etienne Wasmer, 2005. "Higher Education Levels, Firm's Outside Option and the Wage Structure," Sciences Po Economics Publications (main) hal-03588645, HAL.
    • Handle: RePEc:hal:spmain:hal-03588645
    DOI: 10.1111/j.1467-9914.2005.00328.x
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    Cited by:

    1. is not listed on IDEAS
    2. Tomáš 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. Wasmer, Etienne, 2002. "Interpreting Europe and US Labor Markets Differences: The Specificity of Human Capital Investments," IZA Discussion Papers 549, IZA Network @ LISER.
    5. Etienne Wasmer, 2006. "Interpreting Europe and US labor markets differences : the specificity of human capital investments," SciencePo Working papers hal-01021294, HAL.

    More about this item

    JEL classification:

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

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