Rational Inattention and Employer Learning
AbstractResearch on employer learning has provided important insights into the dynamic process that determines individual wages, especially during the early part of a worker's career. However, the recent evidence on the absence of employer learning for college graduates by Arcidiacono et al. (2008) and results that economic conditions at labor market entry have persistent effects on wages (for example Oreopoulos et al. (2008)) cast doubt on the model’s validity. This paper extends the employer learning model with the theory of rational inattention introduced by Sims (2006). In the model firms optimally allocate attention (=information processing capacity) to learning about the productivity of different worker groups. I find that firms allocate more attention to learning about the productivities of workers who have a higher impact on profits. Furthermore, firms learn about workers’ productivities as quickly as possible. Taken together these results resolve the discrepancy between the data and the employer learning model.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5311.
Length: 30 pages
Date of creation: Nov 2010
Date of revision:
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Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
- J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-27 (All new papers)
- NEP-CBE-2010-11-27 (Cognitive & Behavioural Economics)
- NEP-LAB-2010-11-27 (Labour Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Arcidiacono & Patrick Bayer & Aurel Hizmo, 2010.
"Beyond Signaling and Human Capital: Education and the Revelation of Ability,"
American Economic Journal: Applied Economics,
American Economic Association, vol. 2(4), pages 76-104, October.
- Peter Arcidiacono & Patrick Bayer & Aurel Hizmo, 2008. "Beyond Signaling and Human Capital: Education and the Revelation of Ability," NBER Working Papers 13951, National Bureau of Economic Research, Inc.
- Patrick J. Bayer & Peter Arcidiacono & Aurel Hizmo, 2010. "Beyond Signaling and Human Capital: Education and the Revelation of Ability," Working Papers 10-51, Duke University, Department of Economics.
- Paul Oyer, 2006. "Initial Labor Market Conditions and Long-Term Outcomes for Economists," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 143-160, Summer.
- Bauer, Thomas & Haisken-DeNew, John P, 2000.
"Employer Learning And The Returns To Schooling,"
CEPR Discussion Papers
2445, C.E.P.R. Discussion Papers.
- Fabian Lange, 2007. "The Speed of Employer Learning," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 1-35.
- Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-88, August.
- Kahn, Lisa B., 2010. "The long-term labor market consequences of graduating from college in a bad economy," Labour Economics, Elsevier, vol. 17(2), pages 303-316, April.
- Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
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