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

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  • Munasinghe, Lalith

    (Columbia University)

  • Sicherman, Nachum

    (Columbia University)

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.

Suggested Citation

  • Munasinghe, Lalith & Sicherman, Nachum, 2004. "Wage Dynamics and Unobserved Heterogeneity: Time Preference or Learning Ability?," IZA Discussion Papers 1436, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp1436
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    1. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
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    13. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 537-579.
    14. Fuchs, Victor R. (ed.), 1982. "Economic Aspects of Health," National Bureau of Economic Research Books, University of Chicago Press, number 9780226267852, September.
    15. Lalith Munasinghe & Nachum Sicherman, 2006. "Why Do Dancers Smoke? Smoking, Time Preference, and Wage Dynamics," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 595-616, Fall.
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    17. Phillip B. Levine & Tara A. Gustafson & Ann D. Velenchik, 1997. "More Bad News for Smokers? The Effects of Cigarette Smoking on Wages," ILR Review, Cornell University, ILR School, vol. 50(3), pages 493-509, April.
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    Cited by:

    1. F. Brune, Lasse, 2007. "The smoker’s wage penalty puzzle: evidence from Britain," ISER Working Paper Series 2007-31, Institute for Social and Economic Research.
    2. Drago, Francesco, 2006. "Career Consequences of Hyperbolic Time Preferences," IZA Discussion Papers 2113, Institute of Labor Economics (IZA).
    3. Lalith Munasinghe & Nachum Sicherman, 2006. "Why Do Dancers Smoke? Smoking, Time Preference, and Wage Dynamics," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 595-616, Fall.
    4. Krupka, Erin L. & Stephens, Melvin, 2013. "The stability of measured time preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 11-19.

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    More about this item

    Keywords

    wage dynamics; unobserved heterogeneity; discount rates; learning ability;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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