working papers

The decline in U.S. fertility since 2008 will reduce the number of high-school graduates in the coming decades and leave the population size smaller and its composition older. We study the response of the higher education market to this "demographic cliff" and quantitatively characterize how that response shapes the aggregate and fiscal consequences of population aging. To do so, we construct a general equilibrium life-cycle model of the higher education market with heterogeneous colleges, college quality and major choice, and subsequent labor market outcomes of workers in different occupations. In the model, the cross-sectional distribution of college quality and major specialization is an equilibrium outcome. Scarcer labor raises the return to schooling, and the resulting expansion of per capita college attendance and of the high-skill tax base absorbs a substantial part of the fiscal cost of aging. The quantitative importance of this margin depends on the structure of the higher education market: when colleges are homogeneous in quality and major, the response of enrollment, and with it the implied effective labor supply, is substantially smaller. We then show that recent cuts in public education funding are particularly costly against this backdrop.