Theories of the Distribution of Labor Earnings

Derek Neal and Sherwin Rosen

No 6378, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Several empirical regularities motivate most theories of the distribution of labor earnings. Earnings distributions tend to be skewed to the right and display a long right tail. The are leptokurtic (positive fourth cumulant) and have a fat tail. Mean earnings always exceed median earnings and the top percentiles of earners account for a disproportionate share of total earnings. Mean earnings also differ greatly across groups defined by occupation, education, experience, and other observed traits. With respect to the evolution of the distribution of earnings for a given cohort, initial earnings dispersion is smaller than the dispersion observed in prime working years. We explore several classes of models that address these stylized facts. Stochastic theories begin with distributional assumptions about worker endowments and then examine the stochastic structures that might generate observed features of the aggregate distribution of earnings. Selection models describe how workers allocate their skills to tasks. Because workers choose their best option from a menu of careers, these allocation decisions generate earnings distributions which tend to be skewed. Sorting models provide dynamic versions of selection models and illustrate how gradual learning about endowments leads to sorting patterns that amplify dispersiion and generate a skewed distribution of earnings within a cohort of experienced workers. Human capital theory demonstrates that earnings dispersion is a prerequisite for significant skill investments. Without earnings dispersion, workers would not willingly make the investments necessary for high-skill jobs. Human capital model illustrate how endowments of wealth and talent influence the investment decisions that generate observed distributions of earnings.

JEL-codes: J2 J3 (search for similar items in EconPapers)
Date: 1998-01
Note: LS
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as (Published as "The Theory of Earnings Distributions") Handbook of Income Distribution, Atkinson, A. and F. Bourgignon, eds., North Holland, 2000.

Downloads: (external link)
http://www.nber.org/papers/w6378.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:6378

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w6378

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().