Education and Skilled Labour Market in Rapid Economic Growth

Abstract

John Knight and Walid Y Alali

China had a seven million increase from one million in college admissions between 1998 and 2009; this growth is related to a decrease in the young workers' premium for college. On the other hand, older workers' college premiums went up throughout that time. We demonstrate that the driving cause is the growing need for trained labour. We develop a general equilibrium theory that lets the supply of skilled labour be determined endogenously and takes into account two aspects of human capital: education and labour market experience. Although the availability of education is flexible, gaining experience in the workforce requires time. Young workers' college premiums will drop due to a demand shock that causes a rapid expansion of colleges; nevertheless, experienced college graduates are in high demand and will see a temporary increase in premiums. Young people continue to pour money into institutions despite a low upfront cost because they believe education will pay off greatly in the long run.

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