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

* This paper has been replicated

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  • 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.

Suggested Citation

  • Stacey H. Chen, 2008. "Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 275-289, May.
    • Handle: RePEc:tpr:restat:v:90:y:2008:i:2:p:275-289
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    Replication

    This item has been replicated by:
  • 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.

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    1. Estimating the variance of wages in the presence of selection and unobserved heterogeneity (REStat 2008) in ReplicationWiki

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