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Work experience as a source of specification error in earnings models: implications for gender wage decompositions

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  • Tracy Regan
  • Ronald Oaxaca

Abstract

This paper models the bias from using potential vs actual experience in log wage models. The nature of the problem is best viewed as specification error as opposed to classical errors-in-variables.We correct for the discrepancy between potential and actual work experience and create a predicted measure of work experience. We use the 1979 National Longitudinal Survey of Youth and the Panel Study of Income Dynamics and extend our findings to the Integrated Public Use Microdata Sample. Our results suggest that potential experience biases the effects of schooling and the rates of return to labor market experience. Using such a measure in earnings models underestimates the explained portion of the male–female wage gap.We are able to separately identify the decomposition biases associated with incorrect experience measures and biased parameter estimates.
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Suggested Citation

  • Tracy Regan & Ronald Oaxaca, 2009. "Work experience as a source of specification error in earnings models: implications for gender wage decompositions," Journal of Population Economics, Springer;European Society for Population Economics, vol. 22(2), pages 463-499, April.
    • Handle: RePEc:spr:jopoec:v:22:y:2009:i:2:p:463-499
    DOI: 10.1007/s00148-007-0180-5
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    References listed on IDEAS

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    1. Heather Antecol & Kelly Bedard, 2002. "The Relative Earnings of Young Mexican, Black, and White Women," ILR Review, Cornell University, ILR School, vol. 56(1), pages 122-135, October.
    2. Ronald Oaxaca & Michael Ransom, 2003. "Using Econometric Models for Intrafirm Equity Salary Adjustments," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 1(3), pages 221-249, December.
    3. Tracy L. Regan & Ronald L. Oaxaca & Galen Burghardt, 2007. "A Human Capital Model Of The Effects Of Ability And Family Background On Optimal Schooling Levels," Economic Inquiry, Western Economic Association International, vol. 45(4), pages 721-738, October.
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    More about this item

    Keywords

    Experience; Decomposition; Specification error; C81; J24; J31;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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