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Changes in the Return to Skills and the Variance of Unobserved Ability

Author

Listed:
  • Guido Matías Cortés

    (University of Manchester)

  • Manuel Hidalgo-Pérez

    (U. Pablo de Olavide)

Abstract

Changes in within-group wage inequality are often interpreted as reflecting changes in returns to unobservable skills. This interpretation relies on the highly restrictive assumption that the variance of skills within groups remains constant over time. We propose and implement a new identification strategy which relaxes this assumption using longi- tudinal data. Results based on matched CPS data for 1982-2012 show strong evidence of increases in the dispersion of unobserved skills, par- ticularly among college graduates. Contrary to the conclusion drawn when constant within-group skill variance is assumed, our results sug- gest that the return to skills decreased during the 1980s and early 1990s.

Suggested Citation

  • Guido Matías Cortés & Manuel Hidalgo-Pérez, 2015. "Changes in the Return to Skills and the Variance of Unobserved Ability," Working Papers 15.15, Universidad Pablo de Olavide, Department of Economics.
  • Handle: RePEc:pab:wpaper:15.15
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    More about this item

    Keywords

    Return to skills; Within-group wage inequality;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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