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Why Do Wage Profiles Slope Upwards? Tests of the General Human Capital Model

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  • David Neumark
  • Paul Taubman

Abstract

This paper tests some empirical implications of the general human capital model's explanation of rising wage profiles. At the individual level, the model implies that there will be a negative relationship between the initial wage level and wage growth of young, inexperienced workers. At the market level, the model implies that the present value of the wage profile of an investor equals that of an otherwise identical non-investor, or that the ratio of the present values equals one. We test both of these hypotheses. Evidence on the wage level-wage growth tradeoff points to a negative relationship between initial wage levels and wage growth, even after correcting for negative biases that may have influenced existing estimates of this relationship. Evidence on present values of wage profiles suggests that the ratio of the present value of rising wage profiles to flat wage profiles is quite close to one. Alternative estimates of this ratio are tightly clustered around one, and more often than not are insignificantly different from one. Overall, then, the evidence is largely consistent with the general human capital model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4688.

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Date of creation: Mar 1994
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Publication status: published as Journal of Labor Economics, Vol. 13, no. 4 (1995): pp. 736-761.
Handle: RePEc:nbr:nberwo:4688
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  1. McKinley L. Blackburn & David Neumark, 1991. "Omitted-Ability Bias and the Increase in the Return to Schooling," NBER Working Papers 3693, National Bureau of Economic Research, Inc.
  2. Judith K. Hellerstein & David Neumark, 1995. "Are Earnings Profiles Steeper Than Productivity Profiles? Evidence from Israeli Firm-Level Data," Journal of Human Resources, University of Wisconsin Press, vol. 30(1), pages 89-112.
  3. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-20, September.
  4. Lorne Carmichael, 1983. "Firm-Specific Human Capital and Promotion Ladders," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 251-258, Spring.
  5. George A. Akerlof & Lawrence F. Katz, 1988. "Workers' Trust Funds and the Logic of Wage Profiles," NBER Working Papers 2548, National Bureau of Economic Research, Inc.
  6. Robert H. Topel & Michael P. Ward, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 439-479.
  7. Polachek, Solomon William, 1975. "Differences in Expected Post-school Investments as a Determinant of Market Wage Differentials," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 451-70, June.
  8. Brown, James N, 1989. "Why Do Wages Increase with Tenure? On-the-Job Training and Life-Cycle Wage Growth Observed within Firms," American Economic Review, American Economic Association, vol. 79(5), pages 971-91, December.
  9. 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.
  10. Willis, Robert J., 1987. "Wage determinants: A survey and reinterpretation of human capital earnings functions," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 10, pages 525-602 Elsevier.
  11. Alan S. Blinder, 1982. "Private Pensions and Public Pensions: Theory and Fact," NBER Working Papers 0902, National Bureau of Economic Research, Inc.
  12. Edward P. Lazear & Robert L. Moore, 1984. "Incentives, Productivity, and Labor Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 99(2), pages 275-296.
  13. James L. Medoff & Katharine G. Abraham, 1981. "Are Those Paid More Really More Productive? The Case of Experience," Journal of Human Resources, University of Wisconsin Press, vol. 16(2), pages 186-216.
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Cited by:

  1. Einarsson, Tor & Marquis, Milton H., 1999. "Formal Training, On-the-Job Training and the Allocation of Time," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 423-442, July.
  2. Mateusz Walewski, 2007. "Analysis of cross-country differences in the shape of the age-wage relationship with an attempt to tackle age-productivity differences within the EU," CASE Network Studies and Analyses 0351, CASE-Center for Social and Economic Research.
  3. David Neumark, 2001. "Age Discrimination Legislation in the United States," NBER Working Papers 8152, National Bureau of Economic Research, Inc.
  4. Lydon, Reamonn & Walker, Ian, 2004. "Welfare-to-Work, Wages and Wage Growth," IZA Discussion Papers 1144, Institute for the Study of Labor (IZA).
  5. Zwick, Thomas, 2009. "Why Pay Seniority Wages?," ZEW Discussion Papers 09-005, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Zwick, Thomas, 2011. "Seniority wages and establishment characteristics," Labour Economics, Elsevier, vol. 18(6), pages 853-861.
  7. George J. Borjas, 1998. "The Economic Progress of Immigrants," NBER Working Papers 6506, National Bureau of Economic Research, Inc.
  8. Li, Gan & Jaeun, Shin & Qi, Li, 2010. "Initial Wage, Human Capital and Post Wage Differentials," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 51(2), pages 23-42, December.
  9. Rosemary Walker & Liviu Florea, 2014. "Easy-Come-Easy-Go: Moral Hazard in the Context of Return to Education," Journal of Business Ethics, Springer, vol. 120(2), pages 201-217, March.
  10. Mengistae, Taye, 1999. "The relative effects of skill formation and job matching on wage growth in Ethiopia," Policy Research Working Paper Series 2104, The World Bank.

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