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India's Increasing Skill Premium: Role of Demand and Supply

  • Azam, Mehtabul


    (Oklahoma State University)

The tertiary-secondary (college-high school) wage premium has been increasing in India over the past decade, but the increase differs across age groups. The increase in wage premium has been driven mostly by younger age groups, while older age groups have not experienced any significant increase. This paper uses the demand and supply model with imperfect substitution across age groups developed in Card and Lemieux (2001) to explain the uneven increase in the wage premium across age groups in India. The findings of this paper are that the increase in the wage premium has come mostly from demand shifts in favor of workers with a tertiary education. More importantly, the demand shifts occurred in both the 1980s and 1990s. Relative supply has played an important role not only determining the extent of increase in wage premium, but also its timing. The increase in relative supply of tertiary workers during 1983-1993 offset the demand shift, limiting the wage premium increase. But during 1993-1999, the growth rate of the relative supply of tertiary workers decelerated, while relative supply was virtually stagnant during 1999-2004. Both of these periods saw an increase in the wage premium as the countervailing supply shift was weak.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3968.

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Length: 37 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:iza:izadps:dp3968
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  1. Gaurav Datt & Martin Ravallion, 2002. "Is India's Economic Growth Leaving the Poor Behind?," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 89-108, Summer.
  2. Angrist, Joshua D, 1996. "Short-Run Demand for Palestinian Labor," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 425-53, July.
  3. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  4. Angus Deaton & Jean Dreze, 2002. "Poverty and Inequality in India: A Re-Examination," Working Papers 184, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  5. Utsav Kumar & Prachi Mishra, 2008. "Trade Liberalization and Wage Inequality: Evidence from India," Review of Development Economics, Wiley Blackwell, vol. 12(2), pages 291-311, 05.
  6. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  7. Marco Manacorda & Carolina Sanchez-Paramo & Norbert Schady, 2010. "Changes in Returns to Education in Latin America: The Role of Demand and Supply of Skills," ILR Review, Cornell University, ILR School, vol. 63(2), pages 307-326, January.
  8. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 7-72, March.
  9. Jorge Saba Arbache & Andy Dickerson & Francis Green, 2004. "Trade Liberalisation and Wages in Developing Countries," Economic Journal, Royal Economic Society, vol. 114(493), pages F73-F96, 02.
  10. Nina Pavcnik, 2000. "What Explains Skill Upgrading in Less Developed Countries?," NBER Working Papers 7846, National Bureau of Economic Research, Inc.
  11. David Card & John E. DiNardo, 2002. "Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 733-783, October.
  12. repec:tpr:qjecon:v:116:y:2001:i:2:p:705-746 is not listed on IDEAS
  13. Kevin M. Murphy & W. Craig Riddell & Paul M. Romer, 1998. "Wages, Skills, and Technology in the United States and Canada," NBER Working Papers 6638, National Bureau of Economic Research, Inc.
  14. David Card & Thomas Lemieux, 2000. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," NBER Working Papers 7655, National Bureau of Economic Research, Inc.
  15. Puja Vasudeva Dutta, 2005. "Accounting for Wage Inequality in India," PRUS Working Papers 29, Poverty Research Unit at Sussex, University of Sussex.
  16. repec:oup:qjecon:v:116:y:2001:i:2:p:705-746 is not listed on IDEAS
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