The Roles of Ability and College Quality
in the Evolution of the College Premium
Eleanor Dillon
Gregory Veramendi∗
Arizona State University
Arizona State University
March 24, 2016
Abstract
The gap in earnings between workers with and without a college degree has widened
substantially since 1990. At the same time, the share of workers with at least some college
education has grown. The rise in the college premium may have been affected by the price
of college training, the price of latent abilities, or the composition of college graduates
and the colleges they attend. We estimate a robust dynamic model of educational choices
that accounts for unobserved ability endowments and college quality. Our methodology
accounts for measurement error, imperfect proxies for abilities, and reverse causality.
We document how changes between the National Longitudinal Survey of Youth (NLSY)
1979 and 1997 cohorts in the composition of workers and the determinants of wages have
affected the observed college earnings premium. We find that nearly all the rise in the
college wage premium between 1990 and 2010 can be attributed to a rise in the return
to a college degree, with little role for composition changes or the return to unobserved
abilities.
JEL Codes: I21, J31
Keywords: College Premium, College Quality
∗
ewdillon@asu.edu, gregory.veramendi@asu.edu