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Learning and Wage Dynamics

Henry S. Farber and Robert Gibbons
The Quarterly Journal of Economics
Vol. 111, No. 4 (Nov., 1996), pp. 1007-1047
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2946706
Page Count: 41
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Learning and Wage Dynamics
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Abstract

We 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. We present evidence from the NLSY that is broadly consistent with the model's predictions.

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