Why Doesn't Expanding Higher Education Decrease Wage Inequality?

Overview & Synopsis

The supply of college-educated workers has increased in many countries, but wage inequality has not necessarily decreased. Although skill-biased technical change can explain this phenomenon, we often observe that skill premiums increase in developing countries, where skill-biased technical change is less likely. We show that skill premiums can increase as the supply of skilled workers increases if merit-based pay is introduced. We find that from 1970 to 2010, in many countries, the Gini coefficient and skill premium increased as higher education expanded. The result suggests that meritocracy expands higher education but exacerbates wage inequality.