A large literature has documented a significant increase in the return to college over the past 30 years. The difference between the average wage of college graduates and high school graduates has nearly doubled between 1980 and 2000. This increase is typically measured using nominal wages. Using Census data, I show that from 1980 to 2000 college graduates have increasingly concentrated in metropolitan areas that are characterized by high cost of housing. This implies that college graduates are increasingly exposed to high cost of living and that their wage increases measured in real terms may be smaller than their wage increases measured in nominal terms. To measure the return to college in real terms, I deflate nominal wages using the average cost of housing for the relevant city and education group. I find that about half of the documented increase in the return to college disappears. I consider two alternative explanations for the location decisions of college graduates. Under a supply push hypothesis, the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. Under a demand pull hypothesis, the relative demand of college graduates increases in expensive cities because firms located in these cities increasingly demand college graduates. This can be due to localized skill-biased technical change or positive shocks to the demand faced by industries that employ college graduates and are located in expensive cities (for example: high tech, finance, etc.). The empirical evidence is more consistent with the demand pull hypothesis. I use a simple general equilibrium model to investigate the implications of this finding for utility inequality. |
