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Work Experience as a Source of Specification Error in Earnings Models: Implications for Gender Wage Decompositions

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  • Regan, Tracy L.

    (Boston College)

  • Oaxaca, Ronald L.

    (University of Arizona)

Abstract

We address the bias from using potential vs. actual experience in earnings models. Statistical tests reject the classical errors-in-variable framework. The nature of the measurement error is best viewed as a model misspecification problem. We correct for this by modeling actual experience as a stochastic regressor and predicting experience using the NLSY79 and the PSID. Predicted experience measures are applied to the IPUMS. Our results suggest that potential experience biases the effects of schooling and the rates of return to labor market experience. Using such a measure in earnings models underestimates the explained portion of the male-female wage gap.

Suggested Citation

  • Regan, Tracy L. & Oaxaca, Ronald L., 2006. "Work Experience as a Source of Specification Error in Earnings Models: Implications for Gender Wage Decompositions," IZA Discussion Papers 1920, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp1920
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    More about this item

    Keywords

    decomposition; specification error; experience; gender;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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