Why Do Wage Profiles Slope Upwards? Tests of the General Human Capital Model

34 Pages Posted: 30 Dec 2000 Last revised: 25 Apr 2021

See all articles by David Neumark

David Neumark

University of California, Irvine - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Paul Taubman

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1994

Abstract

This paper tests some empirical implications of the general human capital model's explanation of rising wage profiles. At the individual level, the model implies that there will be a negative relationship between the initial wage level and wage growth of young, inexperienced workers. At the market level, the model implies that the present value of the wage profile of an investor equals that of an otherwise identical non-investor, or that the ratio of the present values equals one. We test both of these hypotheses. Evidence on the wage level-wage growth tradeoff points to a negative relationship between initial wage levels and wage growth, even after correcting for negative biases that may have influenced existing estimates of this relationship. Evidence on present values of wage profiles suggests that the ratio of the present value of rising wage profiles to flat wage profiles is quite close to one. Alternative estimates of this ratio are tightly clustered around one, and more often than not are insignificantly different from one. Overall, then, the evidence is largely consistent with the general human capital model.

Suggested Citation

Neumark, David and Taubman, Paul, Why Do Wage Profiles Slope Upwards? Tests of the General Human Capital Model (March 1994). NBER Working Paper No. w4688, Available at SSRN: https://ssrn.com/abstract=254557

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Paul Taubman

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