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Learning and Wage Dynamics

  • Farber, Henry S
  • Gibbons, Robert

The authors develop a dynamic model of learning about worker ability in a competitive labor market. The model produces three testable implications regarding wage dynamics: (1) although the role of schooling in the labor market's inference process declines as performance observations accumulate, the estimated effect of schooling on the level of wages is independent of labor-market experience; (2) time invariant variables correlated with ability but unobserved by employers (such as certain test scores) are increasingly correlated with wages as experience increases; and (3) wage residuals are a martingale. The authors present evidence from the National Longitudinal Survey of Youth that is broadly consistent with the model's predictions. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 111 (1996)
Issue (Month): 4 (November)
Pages: 1007-47

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Handle: RePEc:tpr:qjecon:v:111:y:1996:i:4:p:1007-47
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  1. Albrecht, James W., 1980. "A Procedure for Testing the Signalling Hypothesis," Working Paper Series 29, Research Institute of Industrial Economics.
  2. Hause, John C, 1972. "Earnings Profile: Ability and Schooling," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages S108-S38, Part II, .
  3. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  4. Lang, Kevin & Kropp, David, 1986. "Human Capital versus Sorting: The Effects of Compulsory Attendance Laws," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 609-24, August.
  5. John Bound & Alan B. Krueger, 1989. "The Extent of Measurement Error In Longitudinal Earnings Data: Do Two Wrongs Make A Right?," NBER Working Papers 2885, National Bureau of Economic Research, Inc.
  6. MacDonald, Glenn M, 1982. "A Market Equilibrium Theory of Job Assignment and Sequential Accumulation of Information," American Economic Review, American Economic Association, vol. 72(5), pages 1038-55, December.
  7. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
  8. Mclaughlin, K.J., 1990. "Rigid Wages?," RCER Working Papers 229, University of Rochester - Center for Economic Research (RCER).
  9. Harris, Milton & Holstrom, Bengt, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 315-33, July.
  10. John M. Abowd & David Card, 1986. "On the Covariance Structure of Earnings and Hours Changes," NBER Working Papers 1832, National Bureau of Economic Research, Inc.
  11. Card, David & Krueger, Alan B, 1992. "Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 1-40, February.
  12. Riley, John G, 1979. "Testing the Educational Screening Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S227-52, October.
  13. Layard, Richard & Psacharopoulos, George, 1974. "The Screening Hypothesis and the Returns to Education," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 985-98, Sept./Oct.
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