by Joanne Lindley, Kings College London and Stephen Machin, London School of Economics

Mass participation in higher education has altered the typical path followed by university graduates. The norm used to be that after obtaining an undergraduate degree, people would finish their studies and enter the labour market. These days, many more students stay on to invest in postgraduate education. Indeed, by 2009 just over 10% of the workforce in Britain and the United States – and more than a third of all graduates – had a postgraduate qualification.

It is now widely understood that despite rapidly growing numbers of university-educated workers, increased relative demand for their skills has been a key driver of overall wage inequality.

Our research reveals that the changing composition of the graduate labour force – and widening wage differentials within this group – has also been a key feature of rising inequality. At the same time as postgraduates increased their employment share, their relative wages also rose. The time series below shows how the wage differential between those with a postgraduate qualification and those with just an undergraduate degree has increased through time.

It is evident that postgraduates have significantly strengthened their relative wage position in both countries. In the United States, the postgraduate/college only wage differential has risen sharply over time, more than doubling from around 14% in 1980 to just over 30% by 2009. In Britain, the postgraduate/college-only gap is lower but it has risen from 6% in 1996 to 13% by 2009.

So it seems that the relative labour market fortunes of postgraduate and college-only workers have evolved differently through time. The clear pattern that emerges in the two countries is of an increase in both the employment shares and wage differentials for postgraduates vis-à-vis college-only workers. Rising supply coupled with rising relative wages means that relative demand seems to have shifted over time in favour of postgraduate workers compared with college-only workers.

It turns out that there is a stronger connection between increases in the relative demand for postgraduates and measures of technological change – such as R&D, innovation, computer usage and investment in computers – than for college-only graduates. Analysis of changes in employment shares and changes in computer usage in 215 US industries and 51 British industries shows that, for both countries, there is only a positive correlation for postgraduates. That shifts in labour demand towards postgraduates seem to be (at least in part) driven by technological change is also supported by cross-country patterns of changing labour demand and technology. The analysis shows that bigger shifts in demand occurred in the same industries in Britain and the United States and that the changes in computer usage are very much concentrated in the same industries for the two countries.

Postgraduates possess different skills and do jobs involving different (usually more complex) tasks than college-only workers. This is in line with the finding that relative demand has shifted faster in favour of the postgraduate group, and it appears to be an important aspect of rising wage inequality among college graduates.

Overall, our findings on increasing divergences within the group of workers who go to university offer new evidence on how the changing education structure of the workforce has contributed to rising inequality.

We document that there have been significant increases in the number of workers with a postgraduate qualification and that, at the same time as this increase in their relative supply, their relative wages have risen strongly compared with workers with only a college degree.

Trend increases in the relative demand for postgraduates have acted as a key driver of increasing within-graduate inequality and of overall rises in inequality. The relative demand shifts in favour of workers with postgraduate qualifications are strongly correlated with technical change as measured by computer usage and investment.

It turns out that over the years as computer use has become more widespread in most workplaces, the principal beneficiaries of this revolution have not been all graduates, but those with postgraduate qualifications. As such, there has been a strong connection between the increased presence of postgraduate workers in the labour force and rising wage inequality over time.

full paper: http://ideas.repec.org/p/cep/cepcnp/351.html