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Educational choice, initial wage and wage growth

Author

Listed:
  • Hans Ophem

    (University of Amsterdam)

  • Jacopo Mazza

    (Utrecht University)

Abstract

We study the effects of expected initial wages, expected wage growth, and observed and unobserved heterogeneity in the choice of college major in a sample of American college graduates. We propose a three-stage empirical model that relates future earnings to individual choices. In the first stage, starting from revealed choices, observed wages, and life-cycle wage profiles, we estimate the expectation on initial wages and wage growth from the individual point of view, where the panel structure of the data allows us to produce estimates corrected for self-selection bias. We find substantial differences in expected real wages and expected real wage growth between majors and that both characteristics of life cycle earnings influence major choice. Our parametric models show a strong correlation between salary trends and major choice, whereas semiparametric models yield less reliable results. We interpret our results as being consistent with agents being rational and as a validation for our estimation strategy based on counterfactual imputation.

Suggested Citation

  • Hans Ophem & Jacopo Mazza, 2024. "Educational choice, initial wage and wage growth," Empirical Economics, Springer, vol. 67(3), pages 1235-1274, September.
    • Handle: RePEc:spr:empeco:v:67:y:2024:i:3:d:10.1007_s00181-024-02580-5
    DOI: 10.1007/s00181-024-02580-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Wage inequality; Wage uncertainty; Unobserved heterogeneity; Selection bias; Decision making under risk and uncertainty; Semiparametric estimation;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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