Earnings Dynamics: The Role of Education throughout a Worker's Career

Abstract

This paper describes two stylized facts about the earnings dynamics throughout a worker’s career. First, this paper shows that more educated workers have higher earnings growth with work experience than less educated workers. Second, it demonstrates that more educated workers suffer greater earnings losses following job displacement. I propose a model that integrates human capital accumulation and learning mechanisms that can explain these empirical findings. In the model, employers use both education and past job displacement as a signal of a worker’s unobservable ability. As a result, educated workers receive more on-the-job training in the beginning of their careers. In addition, educated workers suffer greater wage losses after being laid off when potential employers learn that an educated worker is low ability.