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Testing the Specification of the Mincer Wage Equation

  • Belzil, Christian

    ()

    (Ecole Polytechnique, Paris)

I perform the joint estimation of a reduced-form dynamic model of the transition from one grade level to the next, and a Mincer wage equation, using panel data taken from the NLSY. A very high degree of flexibility is achieved by approximating the distributions of idiosyncractic grade transition shocks and wage shocks with high dimensional normal mixtures. The model rejects all simplifying assumptions common in the empirical literature. In particular, the log wage regression is highly convex, even after conditioning on unobserved and observed skills. Skill heterogeneity is also found to be over-estimated when non-linearity is ignored. After conditioning on skill heterogeneity, I also find evidence of non-separability between the effect of schooling and experience (schooling has a positive effect on wage growth). Finally, the variance of the idiosyncratic wage shock is reduced by obtaining higher education.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2650.

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Length: 37 pages
Date of creation: Mar 2007
Date of revision:
Publication status: published in: Annales d'Economie et de Statistique, 2008, 92/92, 427 - 451
Handle: RePEc:iza:izadps:dp2650
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  1. Christian Belzil, 2007. "The Return to Schooling in Structural Dynamic Models: A Survey," Post-Print halshs-00201230, HAL.
  2. A Gosling & Stephen Machin, 1995. "The Changing Distribution of Male Wages in the UK," CEP Discussion Papers dp0271, Centre for Economic Performance, LSE.
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  6. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," CIRANO Working Papers 2002s-19, CIRANO.
  7. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  8. Belzil, Christian & Hansen, Jörgen, 2002. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model," IZA Discussion Papers 512, Institute for the Study of Labor (IZA).
  9. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
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  11. Carneiro, Pedro & Hansen, Karsten T. & Heckman, James J., 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," IZA Discussion Papers 767, Institute for the Study of Labor (IZA).
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  13. Eckstein, Zvi & Wolpin, Kenneth, 1998. "Youth Employment and Academic Performance in High School," IZA Discussion Papers 18, Institute for the Study of Labor (IZA).
  14. Costas Megir & Martin Palme, 2001. "The effect of a social experiment in education," CEE Discussion Papers 0014, Centre for the Economics of Education, LSE.
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  23. Wooldridge, Jeffrey M., 1997. "On two stage least squares estimation of the average treatment effect in a random coefficient model," Economics Letters, Elsevier, vol. 56(2), pages 129-133, October.
  24. Belzil, Christian & Hansen, Jörgen, 2003. "Structural Estimates of the Intergenerational Education Correlation," IZA Discussion Papers 973, Institute for the Study of Labor (IZA).
  25. Taber, Christopher R, 2001. "The Rising College Premium in the Eighties: Return to College or Return to Unobserved Ability?," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 665-91, July.
  26. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-75, September.
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  28. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College," NBER Working Papers 9546, National Bureau of Economic Research, Inc.
  29. John F. Geweke & Michael P. Keane, 1997. "Mixture of normals probit models," Staff Report 237, Federal Reserve Bank of Minneapolis.
  30. Robert M. Sauer, 2004. "Educational Financing and Lifetime Earnings," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1189-1216, October.
  31. Keane, Michael P., 2010. "Structural vs. atheoretic approaches to econometrics," Journal of Econometrics, Elsevier, vol. 156(1), pages 3-20, May.
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