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

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  • Lalith Munasinghe
  • Nachum Sicherman

Abstract

A large portion of the variation in wages and wage growth rates among individuals is due to "unobserved" heterogeneity, and the source of individual heterogeneity is typically attributed to data limitations and/or the unobservability of certain productivity related factors. In this paper we develop a test that discriminates between two inherently unobservable sources of heterogeneity (both of which can clearly account for the variation in wages and wage growth rates): learning ability and workers' inter-temporal preferences (discounting). We apply this test to the large observed differences in wages and wage growth rates between smokers and non-smokers. The evidence supports the discounting hypothesis.

Suggested Citation

  • Lalith Munasinghe & Nachum Sicherman, 2005. "Wage Dynamics and Unobserved Heterogeneity: Time Preference of Learning Ability?," NBER Working Papers 11031, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11031
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    11. 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.
    12. William N. Evans & Edward Montgomery, 1994. "Education and Health: Where There's Smoke There's an Instrument," NBER Working Papers 4949, National Bureau of Economic Research, Inc.
    13. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
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    15. 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.
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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

    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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