CAN SUPPLY CREATE ITS OWN DEMAND - IMPLICATIONS FOR RISING SKILL DIFFERENTIALS

In the 1980s several advanced countries saw rising skilled wage differ entials at the same time as increases in the supply of skilled labour. Some commentators use the orthodox factor demand model based on a com petitive labour market to deduce that there must have been shifts in t he relative demand curve towards more educated labour. In this paper w e show that use of this argument is, in some situations, vulnerable to two criticisms: (i) It is possible to write down reasonable economic models in which the increase in the relative supply of a group can act ually increase its relative wage and employment. (ii) As an empirical matter sample selection bias could be a problem. To illustrate these t wo points we first present a simple matching model and then some empir ical evidence based on the large increase in the relative supply of mo re educated workers that followed the late 1980s changes in the UK edu cational system but did not result in falling wage differentials of th e more educated. (C) 1997 Elsevier Science B.V.