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Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity

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Author Info
Stacey H. Chen (Department of Economics, University at Albany-SUNY)

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Abstract

Identification of potential wage distributions by education is important to the study of the causal links between education, inequality, and uncertainty. Potential wage inequality within an educational group (that is, the variance in wages if all workers had the same education) exceeds the observed statistics because self-selected education truncates wage distributions. Decomposing potential wage inequality into heterogeneity (known to the agent making the educational choice) and uncertainty (unknown to the agent) suggests that wage uncertainty does not necessarily rise with education. It is unobserved heterogeneity, not uncertainty, that explains the observed relationship between college graduation and higher wage inequality. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Publisher Info
Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 90 (2008)
Issue (Month): 2 (02)
Pages: 275-289
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Handle: RePEc:tpr:restat:v:90:y:2008:i:2:p:275-289

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  1. Christian Belzil & Marco Leonardi, 2007. "Risk Aversion and Schooling Decisions," Post-Print halshs-00174507_v1, HAL. [Downloadable!]
    Other versions:
  2. Dan Anderberg, 2008. "Optimal Policy and the Risk Properties of Human Capital Reconsidered," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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This page was last updated on 2009-1-2.

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