Movin' on Up: Interpreting the Earnings-Experience Profile
Bulletin of Economic Research, Vol. 52, Issue 4, October 2000
Posted: 14 Jul 2001
Human capital theory provides the generally accepted interpretation of the relationship between earnings and labor market experience, namely, that general human capital tends to increase with experience. However, there are other plausible interpretations. Search models, for example, generally predict that more time in the labor market increases the chance of finding a better match and, hence, tends to be associated with higher earnings. This paper shows how a simple search model can be used to predict the amount of earnings growth that can be assigned to search with the residual being assigned to the human capital model. A substantial, if not the larger, part of the rise in earnings over the life-cycle in Britain can be explained by a simple search model, and virtually all the earnings gap between men and women can be explained in this way. Overall, the evidence suggests that we do need to reinterpret the returns to experience in earnings functions.
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