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Initial Wage, Human Capital and Post Wage Differentials

  • Li, Gan
  • Jaeun, Shin
  • Qi, Li
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Insufficiency in information with which firms judge the productivity of a worker for the first time in the market creates more randomness in initial wages than in later wages. This paper examines whether the initial randomness in wages may have a persistent effecton post wages. We set up a human capital accumulation in which an individual may respond to the positive error in initial wage by adjusting hours worked thereafter in her career, and consequently may receive higher future wages than those who draw a negative error in initial wages but otherwise are equivalent. The model predicts that the initial wage, in particular, its random component, is a persistently important factor having positive effecton future wages. Using data from the National Longitudinal Survey of Youth 79, we find empirical evidence that this effect is indeed positive and persists even after 20 years since the initial entry to labor market. The decomposition of initial wages by both parametric and nonparametric IV methods further shows that this effectis derived by the random component, nott he observable component, of the initial wage. It implies that the observed cross-sectional wage variation within group can be accounted for the initial randomness in wages.

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Article provided by Hitotsubashi University in its journal Hitotsubashi Journal of Economics.

Volume (Year): 51 (2010)
Issue (Month): 2 (December)
Pages: 23-42

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Handle: RePEc:hit:hitjec:v:51:y:2010:i:2:p:23-42
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  1. Gary S. Becker, 1975. "Investment in Human Capital: Rates of Return," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, Second Edition, pages 45-144 National Bureau of Economic Research, Inc.
  2. Neumark, David & Taubman, Paul, 1995. "Why Do Wage Profiles Slope Upward? Tests of the General Human Capital Model," Journal of Labor Economics, University of Chicago Press, vol. 13(4), pages 736-61, October.
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  4. Gary S. Becker, 1994. "Age, Earnings, Wealth, and Human Capital," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 228-244 National Bureau of Economic Research, Inc.
  5. William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
  6. James Heckman & Lance Lochner & Ricardo Cossa, 2002. "Learning-By-Doing Vs. On-the-Job Training: Using Variation Induced by the EITC to Distinguish Between Models of Skill Formation," NBER Working Papers 9083, National Bureau of Economic Research, Inc.
  7. Newey, W.K., 1989. "Efficient Instrumental Variables Estimation Of Nonlinear Models," Papers 341, Princeton, Department of Economics - Econometric Research Program.
  8. Garvey, Gerald T. & Milbourn, Todd T., 2006. "Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad," Journal of Financial Economics, Elsevier, vol. 82(1), pages 197-225, October.
  9. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, volume 1, number 8355.
  10. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 338-75, April.
  11. Gary S. Becker, 1975. "Investment in Human Capital: Effects on Earnings," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, Second Edition, pages 13-44 National Bureau of Economic Research, Inc.
  12. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
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