Estimating a Dynamic Adverse-Selection Model: Labor-Force Experience and the Changing Gender Earnings Gap 1968-93

This paper formulates and estimates a dynamic model of labor supply, occupational sorting, human capital accumulation and discrimination to explain the narrowing gender earnings gap from 1968 to 1993. The paper proves the model is identified and develops a three-step estimation technique. Imperfect information significantly amplifies exogenous shocks: statistical discrimination accounts for 36 percent of the observed gender earnings gap in the mid-to-late 1970s, declining to 22 percent in the mid-to-late 1980s. Differences in preferences are comparatively less important: the gap would have been at least 56 percent smaller in the mid-to-late 1970s and would have nearly closed by the mid-to-late 1980s if it was driven only be preference. Increases in overall productivity and demographic changes account for a large percentage of the decline in the gender earnings gap and the increase in female labor market experience, while a relative increase in productivity raises women's representation in professional occupations.