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

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.