Question

The college wage premium is the ratio of median earnings of those with a bachelor’s degree compared to those with a high school degree. During what Robert Gordon calls “The Information Revolution,” the college wage premium increased rapidly rising from 40% in the 1980s to 70% in the 1990s and 80% through the 2000s. Gordon argues that productivity growth during this period was heavily concentrated in specific sectors such as Information Technology and durable goods manufacturing. Assume workers are paid according to their productivity. Could the sector specific productivity growth lead to the increasing college wage premium? Are Gordon’s arguments in his paper consistent with the trend of increased college wage premium? Briefly explain.

Answer 1

The prices of all goods and services including college fees is decided by the level of demand for such goods and services and the overall perceived benefits decide the demand for the same.

In the recent years, some industries have grown much higher than others and Gordon is correct in his assessment that the Information and Technology and Durable Goods Market has grown thanks to the ever-rising demand for these goods.

The end result is that more people are required in the economy as the demand for such labour force and their salaries have increased over the years.

As companies demand more of labour force in Information and Technology and Durable Goods markets, the demand of labour in these sectors increases. The resultant is that college students also start enrolling more into these courses.

As the demand for these courses increases, so does the relative pricing of the same. The wage premium in itself exists in colleges as these sectors have high paying jobs which will allow for greater overall success of an individual. As their perceived levels of satisfaction increased, so does the price for these courses.

The following graph will help in your clarification: -

Here we can see that the Quantity Demanded Shifts from Q1 to Q2 and the price rises from P1 to P2 this is because the Initial Demand Curve shifts to the right as more students begin to demand for these courses. The equilibrium also shifts from point P1 Q1 to point P2 Q2 as the demand and supply both increases.

It is important to note, that Demand is downward sloping as with reduced prices quantity demanded goes up and supply curve is upward sloping as the exact opposite takes place.

Further, the demand curves shift because of industrial change and not price factors.