Why has wage inequality evolved so differently between Japan and the US? The role of the supply of college-educated workers

• The wage gap of college and high-school graduates decreased in Japan, while it increased in the US between 1986 and 2008.
• The number of college graduates grew twice as fast in Japan as in the US during the period.
• This study assesses the importance of the supply factor as a determinant of the college wage premium.
• The supply factor explains about 60% of these contrasting trends.

Why has wage inequality not changed in Japan while it has secularly increased in the US over the last few decades? Pointing to the difference in the trends of the college wage premium in the two countries as a proximate cause, this study assesses the importance of the supply factor as a determinant of the college wage premium. The wage differential between college and high-school graduates decreased slightly from 0.35 to 0.34 log point in Japan, while it increased from 0.43 to 0.65 log point in the US between 1986 and 2008. During this period, the number of college graduates grew twice as fast in Japan as in the US. Estimations of labor demands for different educational backgrounds and simulations based on counterfactual supply trends reveal that the more rapid increase of college graduates in Japan than in the US explains about 60% of these contrasting trends. The difference in post-war fertility trends largely explains the difference in the supply increase of college graduates between the two countries.