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The Strength of Occupation Indicators as a Proxy for Skill

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  • Levenson, Alec

    ()
    (University of Southern California)

  • Zoghi, Cindy

    ()
    (U.S. Bureau of Labor Statistics)

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    Abstract

    Labor 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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    File URL: http://www.bls.gov/ore/pdf/ec070030.pdf
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    Bibliographic Info

    Paper provided by U.S. Bureau of Labor Statistics in its series Working Papers with number 404.

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    Length: 38 pages
    Date of creation: Mar 2007
    Date of revision:
    Handle: RePEc:bls:wpaper:ec070030

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    Keywords: human capital measurement; job skills; occupation indicator variables;

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    1. 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.
    2. Francine D. Blau & Lawrence M. Kahn, 2000. "Gender Differences in Pay," NBER Working Papers 7732, National Bureau of Economic Research, Inc.
    3. Helwege, Jean, 1992. "Sectoral Shifts and Interindustry Wage Differentials," Journal of Labor Economics, University of Chicago Press, vol. 10(1), pages 55-84, January.
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