UNDERSTANDING THE SUPPLY AND DEMAND FORCES BEHIND THE FALL AND RISE IN THE US SKILL PREMIUM

I develop an assignment model to quantify, in a unified framework, the causal effects of supply and demand forces on the evolution of the college wage premium in the US economy. Specifically, I quantify the relative contributions of four different forces: (i) a within-sector non-neutral technological change, (ii) the creation of new high-skill services/sectors, (iii) polarizing product demand shifts, and (iv) shifts in the relative supply of skilled labor. The model considers endogenous human capital accumulation. I find that positive supply shifts completely explain the fall of the skill premium during the period 1970–1980. Demand forces play a major role in the post-1980 period, when the skill premium rises. Among the demand forces, the results show an increasing contribution of polarizing product demand shifts over the decades. On the other hand, the effect of the within-sector non-neutral technological change is more important in the earlier decades of the post-1980 period.