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Wage Dynamics and Unobserved Heterogeneity: Time Preference or Learning Ability?

Author

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  • Munasinghe, Lalith

    () (Columbia University)

  • Sicherman, Nachum

    () (Columbia University)

Abstract

A large fraction of the variation in wage levels and wage growth rates among individuals remains unexplained. Economists argue that “unobserved” heterogeneity is among the more likely reasons for this unexplained variation in wages. The source of individual heterogeneity is typically attributed to data limitations and the unobservability of certain productivity related factors. In this paper we present a theory of career choice and derive a discriminating test between two inherently unobservable sources of heterogeneity — learning ability and workers’ inter-temporal preferences (discounting) — both of which can clearly account for the variation in wage levels and wage growth rates. We apply this test to the large observed differences in wages and wage growth rates between smokers and non-smokers. The empirical evidence suggests that smoking is a proxy for individual discount rates.

Suggested Citation

  • Munasinghe, Lalith & Sicherman, Nachum, 2004. "Wage Dynamics and Unobserved Heterogeneity: Time Preference or Learning Ability?," IZA Discussion Papers 1436, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp1436
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    References listed on IDEAS

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    1. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
    2. William N. Evans & Edward Montgomery, 1994. "Education and Health: Where There's Smoke There's an Instrument," NBER Working Papers 4949, National Bureau of Economic Research, Inc.
    3. Hersch, Joni, 2000. "Gender, Income Levels, and the Demand for Cigarettes," Journal of Risk and Uncertainty, Springer, vol. 21(2-3), pages 263-282, November.
    4. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
    5. Robert Becker & Edwin Burmeister (ed.), 1990. "Growth Theory," Books, Edward Elgar Publishing, volume 0, number 534.
    6. Munasinghe, Lalith, 2000. "Wage Growth and the Theory of Turnover," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 204-220, April.
    7. Victor R. Fuchs, 1982. "Time Preference and Health: An Exploratory Study," NBER Chapters,in: Economic Aspects of Health, pages 93-120 National Bureau of Economic Research, Inc.
    8. W. Kip Viscusi & Joni Hersch, 2001. "Cigarette Smokers As Job Risk Takers," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 269-280, May.
    9. Phillip B. Levine & Tara A. Gustafson & Ann D. Velenchik, 1995. "More Bad News for Smokers? The Effects of Cigarette Smoking on Labor Market Outcomes," NBER Working Papers 5270, National Bureau of Economic Research, Inc.
    10. Sander, William, 1995. "Schooling and smoking," Economics of Education Review, Elsevier, vol. 14(1), pages 23-33, March.
    11. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    12. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 537-579.
    13. Lalith Munasinghe & Nachum Sicherman, 2006. "Why Do Dancers Smoke? Smoking, Time Preference, and Wage Dynamics," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 595-616, Fall.
    14. Sherwin Rosen, 1972. "Learning and Experience in the Labor Market," Journal of Human Resources, University of Wisconsin Press, vol. 7(3), pages 326-342.
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    Cited by:

    1. Krupka, Erin L. & Stephens, Melvin, 2013. "The stability of measured time preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 11-19.
    2. Lalith Munasinghe & Nachum Sicherman, 2006. "Why Do Dancers Smoke? Smoking, Time Preference, and Wage Dynamics," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 595-616, Fall.
    3. Brune, Lasse F., 2007. "The smoker's wage penalty puzzle: evidence from Britain," ISER Working Paper Series 2007-31, Institute for Social and Economic Research.
    4. Drago, Francesco, 2006. "Career Consequences of Hyperbolic Time Preferences," IZA Discussion Papers 2113, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    wage dynamics; unobserved heterogeneity; discount rates; learning ability;

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • 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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