Higher education levels, firms' outside options and the wage structure

Åsa Rosén, Etienne Wasmer

    Research output: Contribution to journalArticle

    Abstract

    We analyze 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. A key insight is that an increase in the average education level exerts a negative externality on wages through its positive externality on 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 1970s and 1980s. Based upon differences in legal employment protection we also provide an explanation for the diverging evolution of real and relative wages in Continental Europe.

    Original languageEnglish (US)
    Pages (from-to)621-654
    Number of pages34
    JournalLabour
    Volume19
    Issue number4
    DOIs
    StatePublished - Dec 1 2005

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    higher education
    real wages
    wage
    firm
    worker
    education
    job security
    work force
    supply
    bargaining
    experience

    ASJC Scopus subject areas

    • Demography
    • Geography, Planning and Development

    Cite this

    Higher education levels, firms' outside options and the wage structure. / Rosén, Åsa; Wasmer, Etienne.

    In: Labour, Vol. 19, No. 4, 01.12.2005, p. 621-654.

    Research output: Contribution to journalArticle

    Rosén, Åsa ; Wasmer, Etienne. / Higher education levels, firms' outside options and the wage structure. In: Labour. 2005 ; Vol. 19, No. 4. pp. 621-654.
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