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Employer learning and statistical discrimination

  • Joseph G. Altonji
  • Charles R. Pierret

We provide a test for statistical discrimination or "rational" stereotyping in environments in which agents learn over time. Our application is to the labor market. If profit maximizing firms have limited information about the general productivity of new workers, they may choose to use easily observable characteristics such as years of education to "statistically discriminate" among workers. As firms acquire more information about a worker, pay will become more dependent on actual productivity and less dependent on easily observable characteristics or credentials that predict productivity. Consider a wage equation that contains both the interaction between experience and a hard-to-observe variable that is positively related to productivity, and the interaction between experience and a variable that firms can easily observe, such as years of education. We show that the wage coefficient on the unobservable productivity variable should rise with time in the labor market and the wage coefficient on education should fall. We investigate this proposition using panel data on education, the AFQT test, father's education, and wages for young men and their siblings from NLSY. We also examine the empirical implications of statistical discrimination on the basis of race. Our results support the hypothesis of statistical discrimination, although they are inconsistent with the hypothesis that firms fully utilize the information in race. Our analysis has wide implications for the analysis of the determinants of wage growth and productivity and the analysis of statistical discrimination in the labor market and elsewhere.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Macroeconomic Issues with number WP-97-11.

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Date of creation: 1997
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Handle: RePEc:fip:fedhma:wp-97-11
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  1. Becker, Gary S., 1971. "The Economics of Discrimination," University of Chicago Press Economics Books, University of Chicago Press, edition 2, number 9780226041162.
  2. Edward P. Lazear, 1984. "Raids and Offermatching," NBER Working Papers 1419, National Bureau of Economic Research, Inc.
  3. Robert Gibbons & Lawrence Katz, 1989. "Layoffs and Lemons," Working Papers 629, Princeton University, Department of Economics, Industrial Relations Section..
  4. Borjas, George J, 1992. "Ethnic Capital and Intergenerational Mobility," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 123-50, February.
  5. Richard Startz & Lundberg, . "Private Discrimination and Social Intervention in Competitive Labor Markets," Rodney L. White Center for Financial Research Working Papers 19-81, Wharton School Rodney L. White Center for Financial Research.
  6. Richard J. Murnane & John B. Willett & Frank Levy, 1995. "The Growing Importance of Cognitive Skills in Wage Determination," NBER Working Papers 5076, National Bureau of Economic Research, Inc.
  7. Harry J. Holzer, 1986. "Search Method Use by Unemployed Youth," NBER Working Papers 1859, National Bureau of Economic Research, Inc.
  8. Joseph G. Altonji & Charles R. Pierret, . "Employer Learning and the Signaling Value of Education," IPR working papers 96-11, Institute for Policy Resarch at Northwestern University.
  9. Albrecht, James W., 1980. "A Procedure for Testing the Signalling Hypothesis," Working Paper Series 29, Research Institute of Industrial Economics.
  10. Joseph G. Altonji & James R. Spletzer, 1991. "Worker characteristics, job characteristics, and the receipt of on-the-job training," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 45(1), pages 58-79, October.
  11. Harley Frazis, 1993. "Selection Bias and the Degree Effect," Journal of Human Resources, University of Wisconsin Press, vol. 28(3), pages 538-554.
  12. Farber, Henry S & Gibbons, Robert, 1996. "Learning and Wage Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1007-47, November.
  13. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  14. Carmichael, H Lorne, 1989. "Self-Enforcing Contracts, Shirking, and Life Cycle Incentives," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 65-83, Fall.
  15. Lang, Kevin, 1986. "A Language Theory of Discrimination," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 363-82, May.
  16. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
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