Wage Premiums for College Graduates

Abstract

Against a general trend over the last 25 years of increasing wage differentials between college and high school graduates, two departures are noteworthy. Between 1971 and 1979, the college wage premium fell by about a third for young graduates and somewhat less for older workers. To some, this narrowing wage differential marked the end of an era when investments in college yielded returns comparable to other investments. In retrospect, the decline in the 1970s was a temporary phenomenon caused by a rapid increase in numbers of college graduates and the baby boom cohorts' entry into the job market. Then, between 1979 and 1986, the college wage premium rose very sharply, exceeding anything found in earlier data. After documenting changes in the college wage premium between 1963 and 1986, we explore dimensions of the recent increase by age, race, and sex, as well as the wage differentials between high school dropouts and graduates and between college dropouts and graduates. Although alternative explanations of earlier departures from the general trend can be found, the sole explanation for the recent dramatic rise in the premium is that the demand for college-trained workers has increased hugely.