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Learning and Wage Dynamics

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  • Henry S. Farber
  • Robert Gibbons

Abstract

We develop a dynamic model of learning and wage determination: education may convey initial information about ability, but subsequent performance observations also are informative. Although the role of schooling in the labor market's inference process declines as performance observations accumulate, the estimated effect of schooling on the level of wages is independent of labor-market experience. In addition: time-invariant variables correlated with ability but unobserved by employers are increasingly correlated with wages as experience increases; wage residuals are a martingale; and wage cuts -are not rare, even for workers who do not change jobs. We present evidence from the National Longitudinal Survey of Youth that is generally consistent with all four of the model's predictions. We conclude that a blend of the learning model with an on-the-job-training model is more plausible than either model alone.

Suggested Citation

  • Henry S. Farber & Robert Gibbons, 1991. "Learning and Wage Dynamics," NBER Working Papers 3764, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3764
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    References listed on IDEAS

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    1. Bound, John & Krueger, Alan B, 1991. "The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 1-24, January.
    2. MacDonald, Glenn M, 1982. "A Market Equilibrium Theory of Job Assignment and Sequential Accumulation of Information," American Economic Review, American Economic Association, vol. 72(5), pages 1038-1055, December.
    3. Card, David & Krueger, Alan B, 1992. "Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 1-40, February.
    4. Hause, John C, 1972. "Earnings Profile: Ability and Schooling," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages 108-138, Part II, .
    5. Layard, Richard & Psacharopoulos, George, 1974. "The Screening Hypothesis and the Returns to Education," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 985-998, Sept./Oct.
    6. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
    7. Albrecht, James W., 1981. "A procedure for testing the signalling hypothesis," Journal of Public Economics, Elsevier, vol. 15(1), pages 123-132, February.
    8. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 315-333.
    9. Kevin Lang & David Kropp, 1986. "Human Capital Versus Sorting: The Effects of Compulsory Attendance Laws," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 609-624.
    10. Riley, John G, 1979. "Testing the Educational Screening Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 227-252, October.
    11. Mclaughlin, K.J., 1990. "Rigid Wages?," RCER Working Papers 229, University of Rochester - Center for Economic Research (RCER).
    12. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-445, March.
    13. repec:fth:prinin:265 is not listed on IDEAS
    14. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
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    1. repec:eee:labeco:v:48:y:2017:i:c:p:105-119 is not listed on IDEAS
    2. Hartog, Joop & Raposo, Pedro, 2017. "Are starting wages reduced by an insurance premium for preventing wage decline? Testing the prediction of Harris and Holmstrom (1982)," Labour Economics, Elsevier, vol. 48(C), pages 105-119.

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