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A human capital approach to occupational wage differentials Robb, Andrew Leslie

Abstract

The occupational wage structure has been a subject of much interest in recent years. The interest, however, has concentrated primarily on the short-run aspects of the problem much to the neglect of the long-run. The recent interest in investment in education has prompted this theoretical and empirical study of the long-run occupational earnings structure from the point of view of investment in education. The paper begins by constructing a theoretical model of occupational earnings in which the earnings of an occupation are related to the investment in formal and informal (on the job training and learning by doing) education associated with that occupation. The relation between various occupational earnings streams is established by equating the present values of the expected earnings streams of all occupations. From the theoretical relationship, it can be predicted that the functional relationship between earnings and education should be non-linear with first and second derivatives positive. Moreover, it can be predicted that the degree of non-linearity will be related to the rate of discount that is applied to investment in education. From this section of the paper arise two important conclusions for studies of long-run changes in the occupational wage structure. Firstly, in studying long-run changes in the occupational earnings structure, attention must be paid to the changing distribution of investment in education among the occupations. Secondly, a change in the shape of the functional relation between earnings and education could be related to long-run changes in the appropriate discount rate. The empirical section of the paper tests the predicted relation between earnings and education by means of regression analysis. The prediction that the relationship should be nonlinear (first and second derivatives positive) is borne out by these tests. Moreover, the degree of non-linearity in the empirical relation appears to be approximately the same as predicted from the theoretical model. Finally, using only simple measures of schooling, over 80% of the occupational earnings structure could be explained in the regression analysis.

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