Evolution of the Labor Market in a Rapidly Developing Economy

This paper builds a model for the evolution of the labor market in a rapidly growing economy in response to the arrival of a large number of foreign (high-productivity) rms. Such high-productivity rms increase demand for skill which requires both education and experience. While the return to education will rise, the wages of young college graduates may decrease. The dynamic version of the model also predicts that in the short run, there will be an over-supply of young college graduates and higher wage inequality than in the long run. Using a unique wage dataset, I found that these predictions are consistent with the recent development of the labor market in China. I also found supporting evidence from other rapidly developing countries in the last thirty years.