The Strength of Occupation Indicators as a Proxy for Skill
AbstractLabor economists have long used occupation indicators as a proxy for unobserved skills that a worker possesses. In this paper, we consider whether inter-occupational wage differentials that are unexplained by measured human capital are indeed due to differences in often-unmeasured skill. Using the National Compensation Survey, a large, nationally- representative dataset on jobs and ten different components of requisite skill, we compare the effects on residual wage variation of including occupation indicators and including additional skills measures. We find that although skills do vary across 3-digit occupations, occupation indicators decrease wage residuals by far more than can be explained by skill differentials. This indicates that “controlling for occupation” does not equate to controlling for skill alone, but also for some other factors to a great extent. Additionally, we find that there is considerable within occupation variation in skills, and that the amount of variation is not constant across skill levels. As a result, including occupation indicators in a wage model introduces heteroskedasticity that must be accounted for. We suggest that greater caution be applied when using and interpreting occupation indicators as controls in wage regressions.
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Bibliographic InfoPaper provided by U.S. Bureau of Labor Statistics in its series Working Papers with number 404.
Length: 38 pages
Date of creation: Mar 2007
Date of revision:
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More information through EDIRC
human capital measurement; job skills; occupation indicator variables;
Find related papers by JEL classification:
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
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- Helwege, Jean, 1992. "Sectoral Shifts and Interindustry Wage Differentials," Journal of Labor Economics, University of Chicago Press, vol. 10(1), pages 55-84, January.
- Francine D. Blau & Lawrence M. Kahn, 2000.
"Gender Differences in Pay,"
NBER Working Papers
7732, National Bureau of Economic Research, Inc.
- David H. Autor & Frank Levy & Richard Murnane, 2000. "Upstairs, Downstairs: Computer-Skill Complementarity and Computer-Labor Substitution on Two Floors of a Large Bank," NBER Working Papers 7890, National Bureau of Economic Research, Inc.
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