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The relationship between wage growth and wage levels

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Author Info

  • Tricia Gladden

    (Bureau of Labor Statistics, Washington, DC, USA)

  • Christopher Taber

    (Department of Economics, University of Wisconsin-Madison, Madison, WI, USA)

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    Abstract

    We estimate the covariance between the permanent component of wages and a random coefficient on experience in models both with potential experience and with actual experience. Actual experience is allowed to be arbitrarily correlated with both the permanent component of wages and the random component on experience. We find no evidence that workers of higher ability experience faster wage growth. Our point estimates suggest that a worker with a one standard deviation higher level of permanent ability would have a return to annual potential experience that is 0.61 of a percentage point lower. The analogous point estimate for actual experience is 0.87 of a point lower. Contrary to the popular perception, wage growth among low-skill workers appears to be at least as high as that for a medium-skilled worker. Copyright © 2009 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/jae.1072
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    File URL: http://qed.econ.queensu.ca:80/jae/2009-v24.6/
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

    Volume (Year): 24 (2009)
    Issue (Month): 6 ()
    Pages: 914-932

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    Handle: RePEc:jae:japmet:v:24:y:2009:i:6:p:914-932

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    References

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    1. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
    2. John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
    3. Jagadeesh Gokhale & Laurence J. Kotlikoff, 1999. "The impact of Social Security and other factors on the distribution of wealth," Working Paper 9913, Federal Reserve Bank of Cleveland.
    4. John M. Abowd & David Card, 1986. "On the Covariance Structure of Earnings and Hours Changes," NBER Working Papers 1832, National Bureau of Economic Research, Inc.
    5. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
    6. Eric French & Bhashkar Mazumder & Christopher Taber, 2005. "The changing pattern of wage growth for low skilled workers," Working Paper Series WP-05-24, Federal Reserve Bank of Chicago.
    7. Helen Connolly & Peter T. Gottschalk, 2001. "Returns to Tenure and Experience Revisited -- Do Less Educated Workers Gain Less from Work Experience?," JCPR Working Papers 224, Northwestern University/University of Chicago Joint Center for Poverty Research.
    8. Stephen V. Cameron & James J. Heckman, 1991. "The Nonequivalence of High School Equivalents," NBER Working Papers 3804, National Bureau of Economic Research, Inc.
    9. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-75, March.
    10. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 338-75, April.
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    Cited by:
    1. Lorenzo Cappellari, 2011. "Flexicurity, wage dynamics and inequality over the life-cycle," DISCE - Quaderni dell'Istituto di Economia dell'Impresa e del Lavoro ieil0064, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    2. Xi Chen & Bertrand M. Koebel, 2013. "Fixed cost, variable cost, markups and returns to scale," Working Papers of BETA 2013-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    3. Bingley, Paul & Cappellari, Lorenzo & Westergård-Nielsen, Niels C., 2013. "Unemployment Insurance, Wage Dynamics and Inequality over the Life Cycle," IZA Discussion Papers 7128, Institute for the Study of Labor (IZA).

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