# _Sluggish Demand_

One explanation for the lack of rising returns to education is that, while demand did increase, skilled labor supply rose by even more. Indeed, Figure 24.B and Figure 24.E suggest that the supply of skilled labor has increased continuously, which may have reduced upward-pressure on wages for skilled workers. Figure 25.A shows relative labor supply for adjacent skill groups. Relative labor supply increased by between 30 to 80 percent over the entire period. The sole exception is vocational education relative to upper secondary education, which decreased by 40 percent. At the same time, relative wages declined or remained the same, again with the exception of vocational education. Real hourly wages of upper secondary workers relative to lower secondary workers decreased between February 1991 to February 2004 by 11 percent, and of university workers relative to vocational workers increased by only 4 percent (Figure 25.B).

This contrasts with middle-income Latin American countries. Sanchez-Paramo and Schady (2003) find that real hourly wages of tertiary workers relative to secondary workers increased over the 1990s by 73 percent in Columbia, 48 percent in Mexico, 20 percent in Argentina and 12 percent in Brazil. Similarly, the wage of skilled workers in Malaysia rose 10 percent annually between 1987 and 1993, and the wage of unskilled workers rose less than 5 percent over the same period. The reason is that the supply of skilled workers did not keep up with demand (Tan and Gill 1998).

The combination of rising relative labor supply and falling relative wages suggests weakly increasing or declining labor demand. For vocational education, falling relative labor supply and rising relative wages also suggest small increases or decreases in relative labor demand. Katz and Murphy (1992) developed a framework to back out relative labor demand from relative wage trends controlling for relative labor supply.

Following the methodology laid out in Sanchez-Paramo and Schady (2003), Figure 25.C to Figure 25.E show relative labor demand for different elasticities of substitution across skill levels.<sup>23</sup> Labor demand for university relative to vocational education declined since the early 1990s, and labor demand for upper secondary to lower secondary education declined since early 1997. Labor demand for vocational education has risen throughout.<sup>24</sup> By contrast, Sanchez-Paramo and Schady (2003) show that relative labor demand for tertiary education increased over the 1990s for Argentina, Chile, Colombia and Mexico (and for Brazil since 1993).

23 Following Katz and Murphy (1992) and Sanchez-Paramo and Schady (2003), relative labor demand is backed out from relative wages and relative labor supply from a simple supply-demand model under the assumption of constant elasticity of substitution. The economy is assumed to be operating on the demand curve, and labor supply is taken to be inelastic in the short run. Furthermore, in order to net out compositional changes in the labor force, each cross-section is reweighed to replicate the average genderage (in five year brackets) structure over the entire period (Sanchez-Paramo and Schady 2003). In practice, the reweighing makes little difference to the findings.

24 Using LFS data from 1989 to 1995, Moenjak and Worswick (2003) find that at the upper secondary level, vocational education has a higher return than general education.

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