What happened to the college wage premium?

For American workers, earning a college degree has been a path to higher wages for a very long time. This path became even more economically attractive starting in the early 1980s, when the gap in average wages between college degree holders and high school degree holders began a steep rise. In 1980, a worker with a college degree earned about 39 percent more than a worker with a high school degree. By 2000, that college wage premium had doubled, to 79 percent.

But in a new working paper from the San Francisco Fed, economists Leila Bengali and Robert Valletta, with former Research Associate Cindy Zhao, find that for the last 20 years, the gap in wages of college-educated and high school–educated workers hasn’t really budged. It actually declined following the Great Recession, and in 2023 it was slightly lower than its 2000 value (see Figure 1).

Why does it matter that the college wage premium has stagnated if that premium is still high? While the college wage premium plateaued, the cost of a four-year degree continued to rise, and in 2022–2023 it was 40 percent higher than in 2000–2001, according to data from the National Center for Education Statistics.¹ “If the college wage premium is basically flat over a period when the cost of college is going up, that reduces the typical financial return to a college education,” Valletta said. “So this matters in the broad context of investment in college education, both for individuals and society as a whole.”

A better understanding of the sources of the stagnation of college wage premium can help families, community leaders, and policymakers think carefully about college access, curriculum design, and new paths to economic opportunity.

A supply story or a demand story?

Bengali, Valletta, and Zhao consider explanations for why the college wage premium has stagnated.

Is it that supply of college graduates has increased relative to the supply of high school graduates, and with more supply of workers competing for jobs, their wages aren’t rising as much? Or has demand for college degree workers relative to demand for high school graduates ebbed as new workplace technologies become less reliant on the traditional skills possessed by college graduates?

There is evidence in support of both explanations. The supply of college graduates has indeed increased as a share of the workforce. In 2000, workers with a bachelor’s degree or higher were 31 percent of the civilian labor force. In January 2025, they were 45 percent.²

It also appears that demand for workers with college degrees has declined since 2010. To explore the potential role of demand, the authors look at the minimum educational requirement associated with online job postings. In 2010, there were 1.2 postings requiring a college degree for every 1 posting that did not require a college degree. By 2020, it was 0.6 postings requiring a college degree for every 1 that did not (Figure 2). According to The Economist, “America’s professional-and-business services industry employs more people without a university education than it did 15 years ago, even though there are fewer such people around.”

So it seems that both demand and supply could be factors, but observational data alone can’t reveal how important each is in explaining the stagnation of the college wage premium.

Substituting high school–educated workers for college-educated workers

To provide a quantitative assessment, the authors rely on a model that includes separate measures of supply and demand to explain the college wage premium. Their model identifies an important change that occurred starting around the year 2000: The degree of substitutability between college-educated and high school–educated workers increased. In the 1970s and ’80s, firms were not very likely to switch away from college-educated workers even when their wages were rising quickly relative to high school workers’ wages. The two groups of workers couldn’t easily be substituted for one another.

By the 2000s, however, the substitutability between the two groups had increased. This means that for a given increase in college-educated workers’ wages, firms became more likely to switch to high school–educated workers instead.

In previous research, economists usually assumed that the ability of firms to substitute college-educated and high school–educated workers was constant over time. Bengali, Valletta, and Zhao show this is not the case. If they use their estimate of the substitution rate and other model parameters based on data through the late 1990s to model the college wage premium through 2023, the model will significantly overestimate the college wage premium. This result suggests that the substitution rate increased over time, reducing demand for college-educated workers.

On the supply side, an increasing supply of college graduates relative to high school graduates has tended to push wages for college-educated workers down. However, the size of this downward pressure didn’t change much year to year over the time frame examined; the increase in supply existed in the 1980s when the college wage premium was rising, and it existed in the 2010s when the premium was stagnant. So increases in supply don’t explain why the college wage premium plateaued.

The race between education and technology

The wages for workers with different levels of education depend on the supply of each group as well as how well each group’s abilities complement the technologies that firms use to produce goods and services. In the last two decades of the 20th century, the rapid advances in computer technology meant college-educated workers were in high demand. And while the supply of college grads was increasing, it was not increasing as quickly as demand. The result was a rising college wage premium.

In the 21st century, the nature of technological change has not advantaged college-educated workers to the same degree as before, so firms are able to employ high school–educated workers to a greater extent.

This is not just an effect of the recent proliferation of AI tools in many workplaces. “This pattern we’re seeing, it’s not something that emerged only in the last three or four years when AI came on the scene,” Bengali said. “So I would not interpret this as being attributable specifically to AI.”

One thing that has changed over this longer period is access and familiarity with computer technology. Once the province of college grads, today smartphones live in the pockets of 91 percent of Americans, according to the Pew Research Center. Meanwhile, the supply of college graduates has continued to rise. The result is a college wage premium that has moved little for 20 years.

For young people considering their future, what does all this mean?

“The college wage premium is still very high,” Bengali said. “Yes, it’s been flat since 2000, but I wouldn’t want to overlook that it’s still quite high.” A recent estimate from economists at the Cleveland Fed suggests wages of college-educated workers are still likely to be 76 percent higher than wages of workers with less formal education in 2042.

And earning a college degree is still likely to lead to higher earnings over one’s lifetime. Data from the Center on Education and the Workforce indicate that for workers with a high school or GED diploma, average lifetime earnings were around $1.6 million. For workers with a bachelor’s degree, it was $2.8 million.

It’s also the case that a career post-college depends on many factors that vary with each person. “The work that we present here is an average,” Bengali said. “It doesn’t reflect individual characteristics or choice of major.”

Endnotes

1 Calculated based on the price of total tuition, fees, room, and board at four-year institutions as reported by the National Center for Education Statistics.

2 Calculated based on civilian labor force levels for people aged 25 and over. Data come from the Current Population Survey from the Bureau of Labor Statistics, retrieved from FRED.