Educational choice, initial wage and wage growth

Hans Ophem () and Jacopo Mazza
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Hans Ophem: University of Amsterdam

Empirical Economics, 2024, vol. 67, issue 3, No 13, 1235-1274

Abstract: 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.

Keywords: Wage inequality; Wage uncertainty; Unobserved heterogeneity; Selection bias; Decision making under risk and uncertainty; Semiparametric estimation (search for similar items in EconPapers)
JEL-codes: C14 C34 D81 J31 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00181-024-02580-5

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