Technological Progress and Self-Reinforcing Degree Inflation in the Canadian Labor Market

Abstract

By developing a job search model with college degree as a noisy signal, this paper analyzes the underlying mechanism of a 'degree-inflation,' measured by the proportion of a highly educated workforce performing unskilled tasks (i.e., cross-skill matches). Skilled workers can perform either skilled, or unskilled, tasks depending on their qualification, while unskilled workers can perform unskilled tasks only. Upon a technological progress, the ex post task assignment increases the lottery values of ex ante skilled workforce and vacancies over unskilled counterparts, which triggers the vicious cycle of degree inflation. The quantitative analysis using the Canadian data indicates that degree inflation has eroded a substantial portion of potential welfare gains from the recent technological progress. Furthermore, we compare two potential policy remedies, reduction of college tuition and improvements of college education quality.

Keywords: Degree Inflation, Cross-skill Match, Crowd-out Effect

JEL Classification: I25, J31, J64, O41