The relationship between wage growth and wage levels

Tricia Gladden and Christopher Taber
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Tricia Gladden: Bureau of Labor Statistics, Washington, DC, USA, Postal: Bureau of Labor Statistics, Washington, DC, USA
Christopher Taber: Department of Economics, University of Wisconsin-Madison, Madison, WI, USA, Postal: Department of Economics, University of Wisconsin-Madison, Madison, WI, USA

Journal of Applied Econometrics, 2009, vol. 24, issue 6, pages 914-932

Abstract: We estimate the covariance between the permanent component of wages and a random coefficient on experience in models both with potential experience and with actual experience. Actual experience is allowed to be arbitrarily correlated with both the permanent component of wages and the random component on experience. We find no evidence that workers of higher ability experience faster wage growth. Our point estimates suggest that a worker with a one standard deviation higher level of permanent ability would have a return to annual potential experience that is 0.61 of a percentage point lower. The analogous point estimate for actual experience is 0.87 of a point lower. Contrary to the popular perception, wage growth among low-skill workers appears to be at least as high as that for a medium-skilled worker. Copyright © 2009 John Wiley & Sons, Ltd.

Date: 2009

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