The falling college premium in Spain

The college premium, the difference between the wage of a worker with a college degree and one without, has been steadily increasing in the United States despite a large increase in the proportion of college graduates in the population. And the US college premium is substantial, more than 70% nowadays. The standard explanation is that this is due to an even larger increase in the demand for college graduates on the labor market. It appears that this experience cannot be generalized.

Florentino Felgueroso, Manuel Hidalgo and Sergi Jiménez-Martín show that the college premium in Spain has actually been decreasing, especially for males, and is at about 70% to 95%, depending on the definition. Why is this evolution so different from the United States? First, there seems to be a much more prevalent mismatch between skills and occupations. Higher education in Spain is much more specialized, which is a disadvantage when you cannot find a job in your specialization. This would indicate the drop in the college premium is a composition effect. But the premium also decreased for well-matched workers. Second, job rotation has increased and temporary jobs have become more prevalent. Shorter experience in a sector depresses wages, and this evolution seems to have been particularly strong for educated workers.

Interestingly, it appears that this trend started with the last major labor market reform in Spain, when employment subsidies were introduced along with employment promotion contracts that are supposed to reduce unemployment among the young but came with the cost of a surge in temporary contracts. Shorter tenures are not necessarily bad, especially when firing costs are too high, and a neither is a decline in the college premium. But one would have expected the US story to be even more true in Spain, as industry adapts faster than workers and its fast modernization would have outpaced the supply of skills from the workforce. Apparently not with those particular labor market reforms.