Trends in College–High School Wage Differentials in China: The Role of Cohort-Specific Labor Supply Shift

Abstract

The wage gap between 4-year college (BA) and high school (HS) graduates narrows down among young workers from 2002 to 2009 in urban China, despite steadily increasing BA–HS wage gaps for older workers during the same time. This period corresponds to the labor market entry of a radically increasing number of college-educated labor stimulated by China’s higher education expansion program initiated in 1999. This study examines how cohort-specific relative supply of college-educated labor affects the cohort-specific college wage premiums and the overall BA–HS wage gaps in the labor market. Incorporating an aggregate labor supply model with imperfect substitution across labor with the same education level but in different age groups, changes in age-group-specific BA–HS wage gaps over time are decomposed into changes in aggregate and age-group-specific relative labor supply and demand factors. Findings suggest that the substantially expanded opportunities to attend college contribute to the falling BA–HS income inequality among young post-expansion cohorts: a 1-percent increase in the relative supply of BA-educated workers within one’s own cohorts depresses cohort-specific BA–HS wage gap by 0.2%. Policies that substantially boost educational attainment for certain cohorts could reduce education-related wage gaps for these cohorts and have spillover effects to the wage structure in the labor market.