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

Lalith Munasinghe () and Nachum Sicherman

No 1436, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: wage dynamics; unobserved heterogeneity; discount rates; learning ability (search for similar items in EconPapers)
JEL-codes: J22 J24 J31 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2004-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Wage Dynamics and Unobserved Heterogeneity: Time Preference of Learning Ability? (2005)
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