Labor Substitutability Among Schooling Groups

The degree of substitutability between schooling groups is essential to understanding the role of human capital in income differences and for assessing the economic impact of such policies as schooling subsidies, redistributive taxes, or selective immigration policies. The paper presented in this research seminar marshals information on educational attainments and wage premia for schooling (Mincer return) across countries and over time to identify the likely magnitude of substitutability among schooling groups. That magnitude is captured by the extent the Mincer return depends on relative scarcity of more educated workers, in addition to the quality of schooling and the skill bias in technology. For plausible patterns in schooling quality and technology, the authors place the long-run elasticity of substitution on the order of 4, which is far higher than that commonly used in the literature.