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On the Specification of Mincerian Wage Regressions with Heterogeneity, Non-Linearity, Non-Separability, and Heteroskedasticity

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  • Belzil, Christian

    ()
    (Ecole Polytechnique, Paris)

Abstract

Using panel data taken from the NLSY, I perform the joint estimation of i) a reduced-form dynamic model of the transition from one grade level to the next with observed and unobserved heterogeneity, and ii) a flexible version of the celebrated Mincerian wage regression with skill heterogeneity, non-linearity in schooling, non-separability between the effects of schooling and experience and heteroskedasticity (after conditioning on unobserved skills). The model rejects all simplifying assumptions common in the empirical literature. In particular, the log wage regression is highly convex, even after conditioning on unobserved and observed skills. Skill heterogeneity is also found to be over-estimated when non-linearity is ignored. After conditioning on skill heterogeneity, schooling has a causal effect on wage growth. I find that estimates obtained in a standard framework (assuming separability) may underestimate the returns to schooling upon labor market entrance by as much as 15%. Finally, I find that the variance of the stochastic wage shock decreases with accumulated experience but is more or less independent of schooling.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1083.

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Length: 45 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1083

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Keywords: Mincer regressions; heterogeneity; random coefficient models; returns to schooling; returns to experience;

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  1. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1993. "Hierarchies and compensation: A case study," European Economic Review, Elsevier, Elsevier, vol. 37(2-3), pages 366-378, April.
  2. Fortin, N.M. & Lemieux, T., 1996. "Rank Regressions, Wage Distributions and the Gender Gap," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9607, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Meghir, Costas & Palme, Marten, 2001. "The Effect of a Social Experiment in Education," Working Paper Series in Economics and Finance 0451, Stockholm School of Economics.
  4. Robert M. Sauer, 2004. "Educational Financing and Lifetime Earnings," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1189-1216.
  5. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers, Federal Reserve Bank of Minneapolis 559, Federal Reserve Bank of Minneapolis.
  6. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(2), pages 262-333, April.
  7. Edward P. Lazear, 1999. "Personnel Economics: Past Lessons and Future Directions," NBER Working Papers 6957, National Bureau of Economic Research, Inc.
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