Chapter 10 Wage determinants: A survey and reinterpretation of human capital earnings functions

Abstract

The chapter presents a survey and exposition of the development of the earnings function as an empirical tool for the analysis of the determinants of wage rates. Generically, the term “earnings function” has come to mean any regression of individual wage rates or earnings on a vector of personal, market, and environmental variables thought to influence the wage. The premier application is to the study of the effects of investment in schooling and on-the-job training on the level, pattern, and interpersonal distribution of life cycle earnings associated with the pioneering work on human capital by several mentioned scholars. The chapter is devoted to the theoretical and empirical development of the human capital earnings function during the past 25 years. The chapter surveys the empirical estimates of the rate of return to education and the pattern of life cycle earnings. The chapter discusses the derivation of human capital earnings functions under the assumption of homogenous human capital and introduces the model of heterogeneous human capital described. The chapter considers theoretical and econometric issues, which arise when there is inequality of opportunity and ability and closes with a discussion of empirical findings concerning ability bias. The chapter also describes some recent literature on several topics such as signalling, implicit contracts, and specific human capital, which extend or modify certain aspects of the human capital model.