Skill substitutability, trade with China and college wage premium in Korea

Abstract

AbstractThis study explores the major driving forces behind the dynamic pattern of the college wage premium in Korea since the 1980s, using the demand and supply framework. We find that movements in the college wage premium are mainly explained by expansion of the relative supply of college graduates and an increase in the relative demand for high‐skilled labour due to trade with China. We also find that the substitutability in Korea between college and non‐college‐educated workers is higher, with an elasticity of approximately 3.5–4.1 than that in advanced economies. The counterfactual analyses demonstrate that with a lower substitution elasticity or smaller trade volume with China, Korea might have witnessed a sharp decline in the college wage premium.