Returns To College Over Time: Trends In Europe In The Last 15 Years. Stuck On The Puzzle

While there has been intense debate in the empirical literature about the evolution of the college wage premium in the US, its evolution in Europe has been given little attention. This paper aims to investigate the evolution of the returns to higher education in 12 European countries from 1994 to 2009. In particular, it explores how does this evolution affect wage inequality and how it differs across age cohorts. The period of interest has seen higher education participation rate increasing dramatically: graduate supply considerably outstripped demand which ought to imply a fall in the premium. I use cross country variation in relative supply, demand and labour market institutions to look at their effects on the trend in the college wage gap. I address possible concerns of endogeneity of relative supply by an instrumental variable strategy. Results show a significant decline of college returns in countries with higher relative supply of skilled workers and a marked fall in college returns for recent cohorts for both men and women in all European countries. find evidence that both market and non market factors matter in explaining wage inequality. More specifically, the estimated growth in the wage gap appears negatively correlated to changes in relative supply and positively correlated with the relative demand index, in particular, in countries with higher relative supply of skilled workers, that present a stronger decline in the returns to college. Institutional constraints also matter.