Learning and Wage Dynamics
The authors develop a dynamic model of learning about worker ability in a competitive labor market. The model produces three testable implications regarding wage dynamics: (1) 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; (2) time invariant variables correlated with ability but unobserved by employers (such as certain test scores) are increasingly correlated with wages as experience increases; and (3) wage residuals are a martingale. The authors present evidence from the National Longitudinal Survey of Youth that is broadly consistent with the model's predictions. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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