How Fast Do Wages Adjust to Human-Capital Productivity? Dynamic Panel-Data Evidence from Belgium, Denmark and Finland
The standard human-capital model is based on the assumption that the observed wage of an individual is equal to the monetary value of the individual net human-capital productivity, the so-called net potential wage. We argue that this assumption is rejected by the ECHP data for Belgium, Denmark and Finland. The empirical evidence supports a dynamic approach to the Mincer equation where no equality is imposed but an adjustment between observed and potential earnings is allowed to take place over time. Controlling for regressors' endogeneity, individual heterogeneity and time effects, we estimate a dynamic panel-data wage equation and provide measures of the speed of adjustment in Belgium, Denmark and Finland. Further, we elaborate on the implications of a dynamic approach to the Mincer equation for the computation of the return to schooling, including the implication that this return is not independent of labor-market experience, as suggested by Heckman et al. (2005) and Belzil (2007). Finally, we show that a dynamic wage equation can be seen as the solution of a simple wage-bargaining model and argue that a micro-founded model can fit the data better than a simple adjustment model but requires more theoretical assumptions.
|Date of creation:||Nov 2009|
|Contact details of provider:|| Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany|
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Corrado Andini, 2009.
"Wage Bargaining and the (Dynamic) Mincer Equation,"
AccessEcon, vol. 29(3), pages 1842-1849.
- Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
- Corrado Andini, 2007. "The total impact of schooling on within-groups wage inequality in Portugal," Applied Economics Letters, Taylor & Francis Journals, vol. 15(2), pages 85-90.
- Mikael Lindahl & Alan B. Krueger, 2001.
"Education for Growth: Why and for Whom?,"
Journal of Economic Literature,
American Economic Association, vol. 39(4), pages 1101-1136, December.
- Sokbae Lee, 2004.
"Endogeneity in quantile regression models: a control function approach,"
CeMMAP working papers
CWP08/04, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
- Lee, Sokbae, 2007. "Endogeneity in quantile regression models: A control function approach," Journal of Econometrics, Elsevier, vol. 141(2), pages 1131-1158, December.
- Sokbae Lee, 2004. "Endogeneity in Quantile Regression Models: A Control Function Approach," Econometric Society 2004 North American Summer Meetings 521, Econometric Society.
- Buchinsky, Moshe, 1994. "Changes in the U.S. Wage Structure 1963-1987: Application of Quantile Regression," Econometrica, Econometric Society, vol. 62(2), pages 405-58, March.
- Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
- Corrado Andini, 2007. "Returns to education and wage equations: a dynamic approach," Applied Economics Letters, Taylor & Francis Journals, vol. 14(8), pages 577-579.
- R Blundell & Steven Bond, .
"Initial conditions and moment restrictions in dynamic panel data model,"
W14&104., Economics Group, Nuffield College, University of Oxford.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
- Manuel Arellano & Stephen Bond, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, . "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Connolly, Helen & Gottschalk, Peter T., 6/09.
"Differences in Wage Growth by Education Level: Do Less-Educated Workers Gain Less from Work Experience?,"
IZA Discussion Papers
2331, Institute for the Study of Labor (IZA).
- Helen Connolly & Peter Gottschalk, 2000. "Differences in Wage Growth by Education Level: Do Less Educated Workers Gain Less from Work Experience?," Boston College Working Papers in Economics 473, Boston College Department of Economics, revised 26 Aug 2006.
- Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, 08.
- Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
- Murphy, Kevin M & Welch, Finis, 1990. "Empirical Age-Earnings Profiles," Journal of Labor Economics, University of Chicago Press, vol. 8(2), pages 202-29, April.
- Martins, Pedro S. & Pereira, Pedro T., 2004. "Does education reduce wage inequality? Quantile regression evidence from 16 countries," Labour Economics, Elsevier, vol. 11(3), pages 355-371, June.
- Philip A. Trostel, 2005. "Nonlinearity in the return to education," Journal of Applied Economics, Universidad del CEMA, vol. 8, pages 191-202, May.
- Corrado Andini, 2010.
"A dynamic Mincer equation with an application to Portuguese data,"
Taylor & Francis Journals, vol. 42(16), pages 2091-2098.
- Andini, Corrado, 7/07. "A Dynamic Mincer Equation with an Application to Portuguese Data," IZA Discussion Papers 2897, Institute for the Study of Labor (IZA).
- Chernozhukov, Victor & Hansen, Christian, 2006. "Instrumental quantile regression inference for structural and treatment effect models," Journal of Econometrics, Elsevier, vol. 132(2), pages 491-525, June.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp4583. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If references are entirely missing, you can add them using this form.