The Rising Supply of College Graduates and Declining Returns for Young Cohort: The Case of Korea

Abstract

This study analysed the effect of an increase in the supply of youth college graduates, in terms of the return on education. The rate of return on education in Korea substantially dropped from 1983 to 1994. Since then, however, the declining trend of the rate of return on education stopped and turned upward. The rate of return has declined especially for college graduates, and such a decline has been most prominent for young cohorts, among college graduates, since 1987. The observed trend of the rate of return appears to be related to the sharp increase of labour supply of college graduates since the mid 1980s.

The elasticity of substitution between education levels and age groups was estimated in this study, using a generalized demand-supply model. The effects of relative supply of college graduates (as a whole and by age) on the relative wages of college graduates by age were analysed under the assumption of constant skill-biased technological change. As it turned out, the relative college graduates’ labour supply of each age group had large bearings upon relative wages of each corresponding group, while the relative labour supply of all college graduates did not. It implies that labour is an imperfect substitute, not only between education levels but also between age groups.

Thus, as youth college graduates’ supply increases, there needs to be a corresponding demand increase for them, to avoid the drop in the wage or employment level for them. Therefore, to tackle with the issues of youth labour market, such as youth unemployment, separate policies targeting the youth group are called for.