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Labor Earnings Inequality and Learning About Individual Ability: Theory and Evidence from Japan and the United States

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Futoshi Yamauchi-K. (Kyoto University)

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Abstract

This 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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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0782.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0782

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  1. Richard Blundell & Ian Preston, 1998. "Consumption Inequality And Income Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 603-640, May. [Downloadable!] (restricted)
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  2. Farber, Henry S & Gibbons, Robert, 1996. "Learning and Wage Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1007-47, November. [Downloadable!] (restricted)
  3. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February. [Downloadable!] (restricted)
  4. Ohtake, Fumio & Saito, Makoto, 1998. "Population Aging and Consumption Inequality in Japan," Review of Income and Wealth, Blackwell Publishing, vol. 44(3), pages 361-81, September.
  5. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June. [Downloadable!] (restricted)
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  6. Yamauchi K., Futoshi, 2001. "Does inequality of labor earnings emerge in young days or later? : Labor earnings dynamics and learning about individual ability in heterogeneous society," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 413-434, April. [Downloadable!] (restricted)
  7. Wolff, Edward N, 1996. "International Comparisons of Wealth Inequality," Review of Income and Wealth, Blackwell Publishing, vol. 42(4), pages 433-51, December.
  8. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June. [Downloadable!] (restricted)
  9. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1333-81, September. [Downloadable!] (restricted)
  10. Deaton, Angus & Paxson, Christina, 1994. "Intertemporal Choice and Inequality," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 437-67, June. [Downloadable!] (restricted)
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  11. Peter Gottschalk & Mary Joyce, 1998. "Cross-National Differences In The Rise In Earnings Inequality: Market And Institutional Factors," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 489-502, November. [Downloadable!] (restricted)
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  12. Gittleman, Maury & Wolff, Edward N, 1993. "International Comparisons of Inter-industry Wage Differentials," Review of Income and Wealth, Blackwell Publishing, vol. 39(3), pages 295-312, September.
  13. Robert Gibbons & Kevin J. Murphy, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," NBER Working Papers 3792, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June. [Downloadable!] (restricted)
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