Wage Dynamics with Private Learning-by-Doing and On-the-Job Search

Abstract

This paper develops an equilibrium job search model in which the employed worker privately accumulates human capital and continually searches for a better paying job. In order to encourage production and discourage job turnover, firms reward their workers having better performance and longer job tenure by bonus payments and long service allowances, respectively. The resulting wages grow with human capital accumulation (productive promotion), and job tenure (non-productive promotion) as well as job-to-job transition. I estimate the model using indirect inference to investigate the effect of human capital accumulation on individual wage growth. In the NLSY79 data, the average wage of white male high school graduates after 20 years of market experience is 1.88 times larger than the average of the first full-time wages. A counterfactual experiment using the structural parameter estimates shows that if a typical worker were not able to accumulate human capital, his wage would grow by 41.8%.