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A Comparison of the Human Capital and Signaling Models: The Case of the Self-Employed and the Increase in the Schooling Premium in the 1980's

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  • Lofstrom, Magnus

    ()
    (Public Policy Institute of California)

Abstract

This paper utilizes the self-employed to analyze the observed increase in the educational earnings premium in the 1980’s. The paper compares the predictions of the signaling and human capital models in response to an exogenous demand shock such as a skill-biased technological change. Since the self-employed have no incentive to invest in a costly signal to show to employers their productivity, a change in the schooling equilibrium should not affect their earnings. Four testable hypotheses are derived. The findings suggest that the signaling model may indeed predict the observed changes in the schooling premium that are not consistent with the predictions of the human capital model.

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File URL: http://ftp.iza.org/dp160.pdf
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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 160.

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Length: 40 pages
Date of creation: Jun 2000
Date of revision:
Publication status: published in: Research in Labor Economics, 2001, 20, 191-215
Handle: RePEc:iza:izadps:dp160

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Related research

Keywords: returns to education; Earnings inequality; signaling; human capital model; schooling premium;

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References

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  1. Stiglitz, Joseph E, 1975. "The Theory of "Screening," Education, and the Distribution of Income," American Economic Review, American Economic Association, vol. 65(3), pages 283-300, June.
  2. Richard B. Freeman, 1991. "How Much Has De-Unionisation Contributed to the Rise in Male Earnings Inequality?," NBER Working Papers 3826, National Bureau of Economic Research, Inc.
  3. Betts, Julian R, 1994. "Technological Change, Sectoral Shifts and the Distribution of Earnings: A Human Capital Model," Economica, London School of Economics and Political Science, vol. 61(244), pages 475-92, November.
  4. Magnus Lofstrom, 2002. "Labor market assimilation and the self-employment decision of immigrant entrepreneurs," Journal of Population Economics, Springer, vol. 15(1), pages 83-114.
  5. McKinley L. Blackburn & David E. Bloom & Richard B. Freeman, 1991. "Changes in Earnings Differentials in the 1980s: Concordance, Convergence, Causes, and Consequences," NBER Working Papers 3901, National Bureau of Economic Research, Inc.
  6. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  7. Dennis J. Snower, 1998. "Causes of changing earnings inequality," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 69-133.
  8. Alan B. Krueger, 1991. "How Computers Have Changed the Wage Structure: Evidence From Microdata, 1984-1989," NBER Working Papers 3858, National Bureau of Economic Research, Inc.
  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.
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Cited by:
  1. Stephan O. Hornig & Horst Rottmann & Rüdiger Wapler, 2009. "Information Asymmetry, Education Signals and the Case of Ethnic and Native Germans," CESifo Working Paper Series 2683, CESifo Group Munich.
  2. Hornig, Stephan O. & Rottmann, Horst & Wapler, Rüdiger, 2011. "Sorting on the labour market: A literature overview and theoretical framework," OTH im Dialog: Weidener Diskussionspapiere 27, University of Applied Sciences Amberg-Weiden (OTH).

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