Misallocation, Education Expansion and Wage Inequality

This study offers a unified explanation for the perplexing fact that the education premium rises more for low-experienced workers, while the experience premium increases mainly for low-educated labor. The interaction of signaling, employer learning and credit constraints resolves this puzzle. When higher education expands, talented individuals acquire skills and abandon the uneducated pool. This decreases unskilled-inexperienced wages and boosts inequality, highlighting that talent misallocation compresses wage dispersion. This explanation fits US data, indicating that for three decades the rise in the education and the experience premium coincided with falling unskilled-inexperienced wages, while skilled or experienced wages remained relatively flat