Labor Market Experience and Returns to Education in Fast Growing Economies

China’s college admission rose from one million in 1998 to seven million in 2009, and associated with the expansion is the declining college premium for young workers. However, the college premium for senior workers increased in the same period. We show that the rising demand for skilled workers is the driving force. To explain this, we build a general equilibrium theory that considers two dimensions of human capital, i.e., education and labor market experience, and allow the supply of skilled labor to be endogenously determined. While the supply of education is elastic, the accumulation of labor market experience takes time. A demand shock will lead to a fast college expansion and thus depress the college premium for young workers, but experienced college graduates are in shortage and enjoy a rising premium for a while. Despite of a low immediate college premium, young individuals still flood into colleges because they foresee a high lifetime return to education. JEL Classifications: J24, J23, J31, I28