Analysing wage differentials when workers maximize the return to human capital investment

Maria Jose Perez Villadoniga and Ana Rodriguez-Alvarez

Applied Economics, 2017, vol. 49, issue 42, 4196-4208

Abstract: The analysis of the determinants of differences in wages across workers has traditionally relied on the estimation of average earnings functions. In this article, we propose a new theoretical model where it is the workers who decide the amount they wish to invest in human capital, taking into account the costs of acquiring those skills, for the purpose of maximizing earnings. In this model, both human capital and marginal productivity are likely to be influenced by the individual’s (unobserved) characteristics such as ability or motivation, potentially giving rise to endogeneity problems. In this context, the empirical implementation of our theoretical model allows us, under certain assumptions, to obtain consistent estimates even under the assumption of endogeneity. We present an empirical application to the education sector using data from the Spanish Structure of Earnings Survey 2010. Our results show that females and workers in the private education sector face more difficulties in achieving their maximum potential wage.

Date: 2017
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DOI: 10.1080/00036846.2017.1279267

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