The Demand-Supply-Demand Twist: How the Wage Structure Got More Convex
In the 1990s, in many countries, log wages became a more convex function of education: returns to college increased and returns to intermediate education declined. This paper argues that an important cause of this convexification was a two-stage demand-supply interaction: an increased demand for both sorts of educated workers stimulated a supply response; the increased supply of intermediate-educated further increased the demand for college-educated workers, because these two types of labour are complementary. This argument is supported by an empirical equilibrium model of savings and educational choices for Mexico, where the degree of convexification was amplified by loosening credit constraints.
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