Degree Inflation and Hierarchical Labor Demand

Abstract

This paper develops a multi-sector job search model with college eduction as noisy signals on workers' qualification for skilled tasks to analyze the underlying channel of 'degree-inflation,' measured by the proportion of highly educated workforce employed at unskilled positions (i.e., cross-skill matches). It demonstrates that the recent information and communication technology progress without corresponding improvement of workers' qualification, generates a considerable mass of cross-skill matches, which crowds out the unskilled workforce and suppress unskilled wages. As a result, the college premium remains substantial and the college enrollment rate is self-reinforced. The numerical experiments based on the Canadian data from early 1980s to 2000s suggest that without degree inflation, the unskilled, skilled, and overall wages in the Canadian labor market would be higher by (upto) 46, 43, and 56 percent, respectively, in early 2000s. For this extent, resolving the degree inflation problem, for example, through improving the quality of higher education, would induce substantial welfare gains to not only skilled workers but also unskilled workers.