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Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity

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Author Info

  • Stacey H. Chen

    (Department of Economics, University at Albany-SUNY)

Abstract

Identification of potential wage distributions by education is important to the study of the causal links between education, inequality, and uncertainty. Potential wage inequality within an educational group (that is, the variance in wages if all workers had the same education) exceeds the observed statistics because self-selected education truncates wage distributions. Decomposing potential wage inequality into heterogeneity (known to the agent making the educational choice) and uncertainty (unknown to the agent) suggests that wage uncertainty does not necessarily rise with education. It is unobserved heterogeneity, not uncertainty, that explains the observed relationship between college graduation and higher wage inequality. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.90.2.275
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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 90 (2008)
Issue (Month): 2 (May)
Pages: 275-289

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Handle: RePEc:tpr:restat:v:90:y:2008:i:2:p:275-289

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. Dan Anderberg, 2008. "Optimal Policy and the Risk Properties of Human Capital Reconsidered," CESifo Working Paper Series 2451, CESifo Group Munich.
  2. Christian Belzil & Marco Leonardi, 2007. "Risk Aversion and Schooling Decisions," Working Papers 0716, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  3. Kässi, Otto, 2012. "Uncertainty and Heterogeneity in Returns to Education: Evidence from Finland," MPRA Paper 43503, University Library of Munich, Germany.
  4. Schweri, Jürg & Hartog, Joop & Wolter, Stefan C., 2009. "Do Students Expect Compensation for Wage Risk?," IZA Discussion Papers 4069, Institute for the Study of Labor (IZA).
  5. Farré, Lídia & Klein, Roger & Vella, Francis, 2010. "A Parametric Control Function Approach to Estimating the Returns to Schooling in the Absence of Exclusion Restrictions: An Application to the NLSY," IZA Discussion Papers 4935, Institute for the Study of Labor (IZA).
  6. Yongseok Shin & Sang Yoon (Tim) Lee, 2013. "The Option Value of Human Capital," 2013 Meeting Papers 986, Society for Economic Dynamics.
  7. Mazza, Jacopo & van Ophem, Hans & Hartog, Joop, 2013. "Unobserved heterogeneity and risk in wage variance: Does more schooling reduce earnings risk?," Labour Economics, Elsevier, vol. 24(C), pages 323-338.
  8. Pollmann, Daniel & Dohmen, Thomas & Palm, Franz C., 2012. "Robust Estimation of Wage Dispersion with Censored Data: An Application to Occupational Earnings Risk and Risk Attitudes," IZA Discussion Papers 6447, Institute for the Study of Labor (IZA).
  9. Ali K. Ozdagli & Nicholas Trachter, 2011. "On the distribution of college dropouts: household wealth and uninsurable idiosyncratic risk," Working Papers 11-8, Federal Reserve Bank of Boston.
  10. Koerselman, Kristian & Uusitalo, Roope, 2013. "The Risk and Return of Human Capital Investments," IZA Discussion Papers 7752, Institute for the Study of Labor (IZA).
  11. repec:dgr:uvatin:2011045 is not listed on IDEAS
  12. Christopher Avery & Sarah Turner, 2012. "Student Loans: Do College Students Borrow Too Much--Or Not Enough?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 165-92, Winter.

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