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Learning and Wage Dynamics


  • Henry S. Farber

    (Princeton University)

  • Robert Gibbons

    (Cornell University)


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 predicted to be independent of labor-market experience. The model also predicts that time-invariant variables correlated with ability but unobserved by employers should be increasingly correlated with wages as experience increases and that wage residuals should be a martingale. We present evidence from the National Longitudinal Survey of Youth that is generally consistent with the model's predictions, but a chi-squared goodness-of-fit test does reject the martingale prediction for wage residuals even after accounting for classical measurement error. We investigate alternative specifications and find that a modification of the learning model that allows for worker ability to evolve as an AR1 process fits the data quite well.

Suggested Citation

  • Henry S. Farber & Robert Gibbons, 1994. "Learning and Wage Dynamics," Working Papers 707, Princeton University, Department of Economics, Industrial Relations Section..
  • Handle: RePEc:pri:indrel:328

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    References listed on IDEAS

    1. Parsons, Donald O, 1980. "The Decline in Male Labor Force Participation," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 117-134, February.
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    5. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
    6. James R. Chelius, 1982. "The Influence of Workers' Compensation on Safety Incentives," ILR Review, Cornell University, ILR School, vol. 35(2), pages 235-242, January.
    7. Joshua D. Angrist & Alan B. Krueger, 1990. "The Effect of Age at School Entry on Educational Attainment: An Application of Instrumental Variables with Moments from Two Samples," NBER Working Papers 3571, National Bureau of Economic Research, Inc.
    8. Burgess, Paul L, 1992. "Compliance with Unemployment-Insurance Job-Search Regulations," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 371-396, October.
    9. David Card & Brian P. McCall, 1994. "Is Workers' Compensation Covering Uninsured Medical Costs? Evidence from the 'Monday Effect'," Working Papers 706, Princeton University, Department of Economics, Industrial Relations Section..
    10. Douglas Wolf & David Greenberg, 1986. "The Dynamics of Welfare Fraud: An Econometric Duration Model in Discrete Time," Journal of Human Resources, University of Wisconsin Press, vol. 21(4), pages 437-455.
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