Academic journal article Contemporary Economic Policy

The Shrinking Earnings Premium for University Graduates in Hong Kong: The Effect of Quantity or Quality?

Academic journal article Contemporary Economic Policy

The Shrinking Earnings Premium for University Graduates in Hong Kong: The Effect of Quantity or Quality?

Article excerpt

I. INTRODUCTION

In 1989, the Hong Kong government embarked on a program that would increase the provision of first-year first-degree places from about 7% of the relevant age cohort to 18%. In the 1988-89 academic year, there were 19,496 undergraduates enrolled in government-funded first-degree programs. Enrolment jumped to 47,467 in 1999-2000. This massive expansion of higher education represents an arguably exogenous increase in supply of university graduates. The proportion of degree holders in the workforce rose sharply from 7.4% in 1991 to 16.8% in 2001 (Census & Statistics Department, 2002). However, a systematic evaluation of the effects of higher education expansion has not been performed to date. The present article attempts to fill this gap.

Changes in wage structure have drawn the attention of economists for many years. Coleman (1993) documents the changes in the university premium in the United States from the 1940s to the 1980s. She finds that the earnings premium declined across the board during the 1940s and 1970s, and that it rose during the 1950s, 1960s, and 1980s. Although there was a large overall increase in supply of university graduates over the past few decades, the education premium for university graduates did not show any downward trend in the United States. The leading hypothesis for the observed rise in college premium is skill-biased technical change. Once adjustment is made for a linear time trend in the demand for skilled labor, Katz and Murphy (1992) argue that changes in earnings premium in 1963-87 can largely be explained by the changes in relative supply of university graduates (see also Burbidge et al., 2002; Goldin and Margo, 1992). However, Taber (2001) argues that the returns to college education did not rise in the 1980s, but there was a substantial rise in variance of wage residuals. He attributes the observed rise in college premium to an increase in demand for unobserved skills (see also Chay and Lee, 2000).

The rapid expansion of higher education in Hong Kong offers a unique opportunity for the authors to tease out the effects of changes in demand and supply. If the underlying demand for college workers remains stable, observed changes in the college premium following the rise in supply due to the expansion program will provide an estimate of the demand elasticity for college workers. Arguably, however, the government's decision to expand university education is not exogenous. The government may have adopted its policy because it anticipated an increase in demand for skilled workers. In that case, the observed changes in the college premium will give a lower bound to the estimate of the demand elasticity for college workers. In any case, because the policy-induced change in supply of university graduates is expected to be larger and swifter than other changes in demand and supply due to demographics and technology during the same period, studying the experience of Hong Kong is useful for predicting the general equilibrium effects of an increase in supply of college graduates.

A recent paper by Duflo (2001) and a working paper by Clark and Hsieh (2000) also study the effects of major government policies to increase the supply of educated workers in Indonesia and Taiwan, respectively. Both studies focus on the use of government policies as instruments to measure the returns to education. The present article is similar to these two papers in that they exploit exogenous government policy to provide the means of identifying supply shifts. However, because there is no geographic variation in the implementation of the policy of expanding higher education in Hong Kong, the authors cannot use this policy as an instrumental variable for estimating the returns to education. Instead, they focus on measuring the general equilibrium effects of an economy-wide expansion in supply of college workers. Another difference between the present study and the earlier work is that this article deals with expansion in university education, whereas the earlier studies are about expansion in primary and lower secondary education. …

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