Department of Economics
University of Western Ontario
1151 Richmond St. N.
London, ON, N6A 5C2
Institutional Affiliation: University of Western Ontario
NBER Working Papers and Publications
|November 2017||Wages and Employment: The Canonical Model Revisited|
with Audra Bowlus, Lance Lochner, Chris Robinson: w24069
The basic canonical model fails to predict the aggregate college premium outside of the original sample period (1963-1987) or to account for the observed deviations in college premia for younger vs. older workers. This paper documents that these failings are due to mis-measurement of the relevant prices and quantities when using composition adjustment methods to construct relative skill prices and supplies, which ignore cohort effects that are particularly important in the 1980s and 1990s. Re-estimating the model with prices and quantities that incorporate cohort effects produces a good fit for the out of sample prediction and explains the observed deviation in the college premium for younger vs. older workers even with perfect substitutability across age. Moreover, the estimated elasticit...