Cream-Skimming and the Wage Structure

Wage inequality has evolved differently across education–experience groups. This paper offers a composition-based explanation. When access to education expands, constrained higher-ability workers leave the non-college pool, reducing its average ability and entry wage as the absence of a credential signals lower expected ability. Experienced non-college wages also respond, but less, because private employer learning gives incumbent firms an informational advantage that shields them from the compositional shift. As cream-skimming progresses, the informational wedges of the two education groups can converge because the remaining non-college pool becomes more compressed and the expanding college pool broadens at its lower end. This convergence appears as a narrowing of the gap in education premia between inexperienced and experienced workers or, equivalently, in experience premia between non-college and college workers. U.S. Current Population Survey data document this compression and a pronounced decline in the relative wage of non-college entrants. The mechanism complements demand-side explanations by highlighting the informational roles of education (signaling) and experience (employer learning) in shaping the wage structure.