Wage Dynamics and Unobserved Heterogeneity: Time Preference or Learning Ability?

36 Pages Posted: 5 Jan 2005

See all articles by Lalith Munasinghe

Lalith Munasinghe

Barnard College, Columbia University

Nachum Sicherman

Columbia University; IZA Institute of Labor Economics

Date Written: December 2004

Abstract

A large fraction of the variation in wage levels and wage growth rates among individuals remains unexplained. Economists argue that "unobserved" heterogeneity is among the more likely reasons for this unexplained variation in wages. The source of individual heterogeneity is typically attributed to data limitations and the unobservability of certain productivity related factors. In this paper we present a theory of career choice and derive a discriminating test between two inherently unobservable sources of heterogeneity - learning ability and workers' inter-temporal preferences (discounting) - both of which can clearly account for the variation in wage levels and wage growth rates. We apply this test to the large observed differences in wages and wage growth rates between smokers and non-smokers. The empirical evidence suggests that smoking is a proxy for individual discount rates.

Keywords: Wage dynamics, unobserved heterogeniety, discount rates, learning ability

JEL Classification: J22, J24, J31

Suggested Citation

Munasinghe, Lalith and Sicherman, Nachum, Wage Dynamics and Unobserved Heterogeneity: Time Preference or Learning Ability? (December 2004). IZA Discussion Paper No. 1436. Available at SSRN: https://ssrn.com/abstract=624188

Lalith Munasinghe

Barnard College, Columbia University ( email )

3009 Broadway
New York, NY 10027
United States
212-854-5652 (Phone)

Nachum Sicherman (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4464 (Phone)
212-316-9355 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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