What Drives the Skill Premium: Technological Change or Demographic Variation?

This paper quantitatively examines the effects of two exogenous driving forces, investment-specific technological change (ISTC) and the demographic change known as “the baby boom and the baby bust,” on the evolution of the skill premium and the college enrollment rate in the postwar U.S. economy. We develop a general equilibrium overlapping generations model with endogenous discrete schooling choice. The production technology features capital–skill complementarity as in Krusell et al. (2000). ISTC, through capital–skill complementarity, raises the relative demand for skilled labor, while demographic variation affects the skill premium by changing the age structure and hence the relative supply of skilled labor. We find that ISTC is the key element driving the skill premium in the postwar U.S. economy. And it is quantitatively important for the dynamics of the college enrollment rate. The quantitative importance of the demographic change for the evolution of both the skill premium and the college enrollment rate however is limited.

[1]  Dropout and Enrollment Trends in the Post-War Period: What Went Wrong in the 1970s? , 2000 .

[2]  Ellen R. McGrattan,et al.  Does Neoclassical Theory Account for the Effects of Big Fiscal Shocks? Evidence from World War II , 2006 .

[3]  On Collusion and Industry Size , 2011 .

[4]  Kenneth I. Wolpin,et al.  Accounting for Wage and Employment Changes in the U.S. from 1968-2000: A Dynamic Model of Labor Market Equilibrium , 2010 .

[5]  Hui He.  Why Have Girls Gone to College? A Quantitative Examination of the Female College Enrollment Rate in the United States: 1955-1980 , 2010 .

[6]  Diego Restuccia,et al.  The Evolution of Education : A Macroeconomic Analysis ∗ , 2010 .

[7]  S. Turner.  Going to College and Finishing College , 2004 .

[8]  Hui He,et al.  Investment-specific technological change, skill accumulation, and wage inequality , 2008 .

[9]  C. Goldin.  The Quiet Revolution That Transformed Women’s Employment, Education, and Family , 2006 .

[10]  Z. Eckstein,et al.  The evolution of U.S. earnings inequality: 1961?2002 , 2004 .

[11]  Dirk Krueger,et al.  Social Security Reform with Heterogeneous Agents , 1999 .

[12]  David H. Autor,et al.  Changes in the Wage Structure and Earnings Inequality , 1999 .

[13]  Per Krusell,et al.  Federal Reserve Bank of Minneapolis Research Department Staa Report # 236 Capital-skill Complementarity and Inequality: a Macroeconomic Analysis , 2022 .

[14]  D. Macunovich.  Cohort Size Effects on US Enrollment Decisions , 1996 .

[15]  Daron Acemoglu.  Patterns of Skill Premia , 1999 .

[16]  Per Krusell,et al.  Long-Run Implications of Investment-Specific Technological Change , 1995 .

[17]  Jesús Fernández-Villaverde.  Was Malthus Right? Economic Growth and Population Dynamics , 2001 .

[18]  John Bound,et al.  Changes in the Structure of Wages During the 1980&Apos;S: an Evaluation of Alternative Explanations , 1989, The American economic review.

[19]  Fatih Guvenen,et al.  Understanding Wage Inequality: Ben-Porath Meets Skill-Biased Technical Change , 2006 .

[20]  Douglas H. Joines,et al.  A life cycle analysis of social security , 1995 .

[21]  J. Duffy,et al.  Capital-Skill Complementarity? Evidence from a Panel of Countries , 2004, Review of Economics and Statistics.

[22]  Lawrence F. Katz,et al.  Computing Inequality: Have Computers Changed the Labor Market? , 1997 .

[23]  Ayse Imrohoroglu,et al.  Code for Social Security in an Overlapping Generations Model with Land , 1999 .

[24]  G. Violante,et al.  Investment-Specific Technical Change in the Us (1947-2000): Measurement and Macroeconomic Consequences , 2002 .

[25]  C. Goldin,et al.  The Race between Education and Technology: The Evolution of U.S. Educational Wage Differentials, 1890 to 2005 , 2007 .

[26]  C. Knight,et al.  The evolution of seeds. , 2010, The New phytologist.

[27]  Douglas H. Joines,et al.  Social Security in an Overlapping Generations Economy with Land , 1999 .

[28]  James J. Heckman,et al.  Explaining Rising Wage Inequality: Explorations with a Dynamic General Equilibrium Model of Labor Earnings with Heterogeneous Agents , 1998 .

[29]  Zvi Griliches,et al.  Capital-Skill Complementarity , 1969 .

[30]  Sarah E. Turner,et al.  Going to College and Finishing College.Explaining Different Educational Outcomes , 2004 .

[31]  J. Parker,et al.  Consumption Over the Life Cycle , 1999 .

[32]  S. Navarro.  Using Observed Choices to Infer Agent's Information: Reconsidering the Importance of Borrowing Constraints, Uncertainty and Preferences in College Attendance , 2011 .

[33]  Y. Ben-Porath.  The Production of Human Capital and the Life Cycle of Earnings , 1967, Journal of Political Economy.

[34]  A. Imrohoroglu,et al.  Japanese Saving Rate , 2005 .

[35]  Lawrence F. Katz,et al.  The Race Between Education And Technology , 2008 .