Working Paper: CEPR ID: DP3186
Authors: Asa Rosn; Etienne Wasmer
Abstract: We analyse the consequences of an increase in the supply of highly educated workers on relative and real wages in a search model where wages are set by Nash-bargaining. The key insight is that an increase in the supply of highly educated workers improves the firms? outside option. As a consequence, the real wage of all workers decreases in the short-run. Since this decline is more pronounced for less educated workers, wage inequality increases. In the long-run a better educated work force induces firms to invest more in physical capital. Wage inequality and real wages of highly educated workers increase while real wages of less educated workers may decrease. These results are consistent with the US experience in the 70s and 80s. Based upon differences in legal employment protection we also provide an explanation for the diverging evolution of real and relative wages in Continental Europe.
Keywords: Creation costs; Firing costs; Matching; Wage inequality
JEL Codes: J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in the supply of highly educated workers (J24) | Improvement in firms' outside options (L19) |
| Improvement in firms' outside options (L19) | Decrease in real wages for all workers (J39) |
| Increase in the supply of highly educated workers (J24) | Decrease in real wages for all workers (J39) |
| Decrease in real wages for all workers (J39) | Increase in wage inequality (J31) |
| Increase in the supply of highly educated workers (J24) | Decrease in real wages for less educated workers (F66) |
| Better-educated workforce (J24) | Increase in firms' investment in physical capital (E22) |
| Increase in firms' investment in physical capital (E22) | Increase in real wages for highly educated workers (J39) |
| Increase in firms' investment in physical capital (E22) | Decrease in real wages for less educated workers (F66) |