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This paper presents new evidence that increases in college enrollment lead to a decline in the average quality of college graduates between 1960 and 2000, resulting in a decrease of 6 percentage points in the college premium. A standard demand and supply framework can qualitatively account for the trend in the college and age premia over this period, but substantial quantitative adjustments are needed to account for changes in quality. (JEL I23, J24, J31)

This paper extends the method of local instrumental variables developed by Heckman and Vytlacil [Heckman, J. and Vytlacil, E., 1999. Local instrumental variable and latent variable models for identifying and bounding treatment effects. In: Proceedings of the National Academy of Sciences, 96, 4730–4734; Heckman, J. and Vytlacil, E., 2001. Local Instrumental Variables. In: C. Hsiao, K. Morimune, and J. Powells, (Eds.), Nonlinear Statistical Modeling: Proceedings of the Thirteenth International Symposium in Economic Theory and Econometrics: Essays in Honor of Takeshi Amemiya, Cambridge University Press, Cambridge, (2000), pp. 1–46; Heckman, J. and Vytlacil E., 2005. Structural equations, treatment, effects and econometric policy evaluation. Econometrica 73(3), 669–738] to the estimation of not only means, but also distributions of potential outcomes. The newly developed method is illustrated by applying it to changes in college enrollment and wage inequality using data from the National Longitudinal Survey of Youth of 1979. Increases in college enrollment cause changes in the distribution of ability among college and high school graduates. This paper estimates a semiparametric selection model of schooling and wages to show that, for fixed skill prices, a 14% increase in college participation (analogous to the increase observed in the 1980s), reduces the college premium by 12% and increases the 90-10 percentile ratio among college graduates by 2%.

Economic theory suggests that an extension of the maximum length of entitlement for unemployment benefits increases the duration of unemployment. Empirical results for the reform of the unemployment compensation system in Germany during the 1980s are less clear. The analysis in this paper is motivated by the controversial empirical findings and by recent developments in econometrics for partial identification. We use extensive administrative data with the drawback that registered unemployment is not directly observed. For this reason we bound the reform effect on unemployment duration over different definitions of unemployment. By exploiting the richness of the data we use a nonparametric approach without imposing critical parametric model assumptions. We identify a systematic increase in unemployment duration in response to the reform in samples that amount to less than 15% of the unemployment spells for the treatment group.