Demand and Supply Effects and Returns to College Education: Evidence from a Natural Experiment with Engineers in Denmark

The demand and supply model predicts that a larger relative net supply of a particular educational group will negatively affect its relative earnings. To test this, we use the opening of Aalborg University as a natural experiment, because it created a shock to the supply of electrical and construction engineers in Denmark in the 1980s. The results show that when the supply of electrical and construction engineers peaked, their earnings dropped relative to a comparison group of chemical engineers, which Aalborg University did not supply at the time. Hence, we conclude that even the earnings of engineers, who are in high demand, are susceptible to supply effects.