The Covariance Structure of Earnings and the On the Job Training Hypothesis

John C. Hause

No 25, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The fine structure of earnings is defined by a theoretically meaningful decomposition of the covariance matrix of earnings (or log earnings) time series. A three-element variance components model is proposed for analyzing earnings of young workers. These components are interpreted as the effects of differential on-the-job training (OJT) and differential economic ability. Several properties of these components and relationships between them are deduced from the OJT model. Background noise generated by a nonstationary first-order autoregressive process, with heteroscedastic innovations and time-varying AR parameters is also assumed present in observed earnings. ML estimates are obtained for all parameters of the model for a sample of Swedish males. The results are consistent with the view that the OJT mechanism is an empirically significant phenomenon in determining individual earnings profiles.

Date: 1973-12
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Published as John C. Hause, 1977. "The Covariance Structure Of Earnings And The On-The-Job Training Hypothesis," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 4, pages 6-38 National Bureau of Economic Research, Inc.
Published as (Published as "The Fine Structure of Earnings and On-the-Job Training Hypothesis") Econometrica, Vol. 48, no. 4 (1980): 1013-1030.

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