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A Comparison of the Human Capital and Signaling Models: The Case of the Self-Employed and the Increase in the Schooling Premium in the 1980's

  • Lofstrom, Magnus

    ()

    (Public Policy Institute of California)

This paper utilizes the self-employed to analyze the observed increase in the educational earnings premium in the 1980’s. The paper compares the predictions of the signaling and human capital models in response to an exogenous demand shock such as a skill-biased technological change. Since the self-employed have no incentive to invest in a costly signal to show to employers their productivity, a change in the schooling equilibrium should not affect their earnings. Four testable hypotheses are derived. The findings suggest that the signaling model may indeed predict the observed changes in the schooling premium that are not consistent with the predictions of the human capital model.

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File URL: http://ftp.iza.org/dp160.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 160.

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Length: 40 pages
Date of creation: Jun 2000
Date of revision:
Publication status: published in: Research in Labor Economics, 2001, 20, 191-215
Handle: RePEc:iza:izadps:dp160
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  1. Joseph E. Stiglitz, 1973. "The Theory of 'Screening', Education, and the Distribution of Income," Cowles Foundation Discussion Papers 354, Cowles Foundation for Research in Economics, Yale University.
  2. McKinley L. Blackburn & David E. Bloom & Richard B. Freeman, 1991. "Changes in Earnings Differentials in the 1980s: Concordance, Convergence, Causes, and Consequences," NBER Working Papers 3901, National Bureau of Economic Research, Inc.
  3. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1333-81, September.
  4. Richard B. Freeman, 1991. "How Much Has De-Unionisation Contributed to the Rise in Male Earnings Inequality?," NBER Working Papers 3826, National Bureau of Economic Research, Inc.
  5. Snower, Dennis J., 1999. "Causes of Changing Earnings Inequality," IZA Discussion Papers 29, Institute for the Study of Labor (IZA).
  6. Krueger, Alan B, 1993. "How Computers Have Changed the Wage Structure: Evidence from Microdata, 1984-1989," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 33-60, February.
  7. Lofstrom, Magnus, 1999. "Labor Market Assimilation and the Self-Employment Decision of Immigrant Entrepreneurs," IZA Discussion Papers 54, Institute for the Study of Labor (IZA).
  8. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  9. Betts, Julian R, 1994. "Technological Change, Sectoral Shifts and the Distribution of Earnings: A Human Capital Model," Economica, London School of Economics and Political Science, vol. 61(244), pages 475-92, November.
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