Labor Earnings Inequality and Learning About Individual Ability: Theory and Evidence from Japan and the United States
AbstractThis paper examines the evolution of labor earnings inequality in an environment where individuals learn about their own ability (productivity) from wage realizations. It is shown that innate ability heterogeneity and idiosyncratic income shock variance have distinct effects on the emergence of earnings inequality through changes in learning speed and effort decisions. Given endogenous changes in individual perception, therefore, we are able to explain different patterns of labor earnings inequality evolution in differently endowed societies, observed in the United Kingdom, the United States, Germany and Japan. Finally, a structural model is estimated using data from Japan and the United States. It is found that wage (renumeration) is more directly linked with individual ability (productivity) in the United States than Japan. The weak link of individual ability and wage in Japan slows down the speed by which agents learn about ability, and it makes the evolution of cross-agent effort variability later in carrer in the country.
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Date of creation: 01 Aug 2000
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