Earnings Equations Research Articles

The Effects of Over, Required and Under-Education on Earnings in Manufacturing Sector in Malaysia

This paper presents returns to education by taking into account the quality of jobs match held by workers in the manufacturing sector of Malaysia. This type of study is quite rare not only in the country but also across developing nations. Using the Second Malaysia Productivity Investment Climate Survey (PICS-2), nearly 20 per cent and 30 per cent of workers employed in jobs for which they are overeducated and undereducated, respectively. Further findings indicated that over-education is more acute amongst highly-educated workers whilst under-education is more evident for lowly educated workers. By gender, women have a higher proportion of over-educated workers compared to men. Consequently, over-education leads to lower productivity in terms of earnings. In the study, augmented Mincer earnings equation, i.e. the ORU model clearly showed that although returns to surplus education was positive ( ), the return was lower thanthe returns to required education ( ), approximately 6 per cent against 10 per cent. This means that overeducated workers earn significantly lower than their co-workers who are in similar jobs but who have less education, but well matched. Moreover, the ORU model signified that returns to required education was much greater than returns to actual educational attainment. All of these implied that the rate of return to education depends on the allocation of skills over jobs where earnings is not fully embodied but is (partly) determined by job characteristics and/or by the quality of the match between skills supplied by the worker and skills required by the job. Nevertheless, the situation of over-education among highly educated workers in the Malaysian labour market may impede the country’s intention to move toward the state of being a high-income country, as outlined in the “New Economic Model” blueprint, since it reduces individuals’ productivity. JEL Classifications: J24, J31 Keywords: Over-education, required education, surplus education.

Attrition Bias in Panel Data: A Sheep in Wolf's Clothing? A Case Study Based on the MABEL Survey

This paper investigates the nature and consequences of sample attrition in a unique longitudinal survey of medical doctors. We describe the patterns of non-response and examine if attrition affects the econometric analysis of medical labour market outcomes using the estimation of physician earnings equations as a case study. We compare the econometric estimates obtained from a number of different modeling strategies: balanced versus unbalanced samples; an attrition model for panel data based on the classic sample selection model; and a recently developed copula-based selection model. Descriptive evidence shows that doctors who work longer hours, have lower years of experience, are overseas trained, and have changed their work location are more likely to drop out. Our analysis suggests that the impact of attrition on inference about earnings of General Practitioners is small. For specialists, the impact of attrition is statistically and economically significant, but is on the whole not very large. Finally we discuss how the top-up samples in the MABEL survey can be used to address the problem of panel attrition.

Parameter estimates comparison of earnings functions in the PSID and CPS data, 1976–2007

Comparing earnings equations in the Panel Study of Income Dynamics (PSID) and the Current Population Survey, we find that the PSID considerably underestimates the returns to education during the 1992–2007 period. Non-random selection in the PSID sample appears to be the reason.

Parameter Estimates Comparison of Earnings Functions in the PSID and CPS Data, 1976-2007

This article explores representativeness of the Panel Study of Income Dynamics (PSID) during the period from 1976 to 2007 by comparing earnings equations in the PSID and the Current Population Survey (CPS). We find that CPS-PSID differences in parameter estimates have increased and become statistically significant in the second half of the period, with the PSID considerably underestimating the returns to education. Nonrandom selection in the PSID sample, especially among those with lower levels of education, appears to be the reason.

Foreign Wage Premium, Gender and Education: Insights from Vietnam Household Surveys

AbstractThis paper investigates the differential impacts of foreign ownership on wages for different types of workers (in terms of educational background and gender) in Vietnam using the Vietnam Household Living Standards Surveys of 2002 and 2004. Whereas most previous studies have compared wage levels between foreign and domestic sectors using firm‐level data (thus excluding the informal sector), one advantage of using the Living Standards Surveys in this paper is that the data allow wage comparison analyses to extend to the informal wage sector. A series of Mincerian earnings equations and worker‐specific fixed effects models are estimated. Several findings emerge. First, foreign firms pay higher wages relative to their domestic counterparts after controlling for workers' personal characteristics. Second, the higher the individual workers' levels of education, the larger on average are the wage premiums for those who work for foreign firms. Third, longer hours of work in foreign firm jobs relative to working in the informal wage sector are an important component of the wage premium. Finally, unskilled women experience a larger foreign wage premium than unskilled men, reflecting the low earning opportunities for women and a higher gender gap in the informal wage sector.

Salaried employment and earnings in Indonesia: new evidence on the selection bias

This article uses household survey data to estimate the determinants of earnings in Indonesia, a country where nonsalaried work is widespread and earnings data are available for salaried employees only. We deal with the selection bias by estimating a Full-Information Maximum Likelihood (FIML) system of equations, where selection into the labour market is modelled in a multinomial setting. We find that some estimated parameters of the earnings equation differ from a binomial selection procedure by Heckman (1979), in particular for those variables with the strongest impact on the selection into the different labour-market statuses. However, the estimated returns to education are unaffected, even when we deal with the endogeneity of educational attainment following Duflo (2001). Overall, our findings show that the choice of the selection rule affects the estimates of the earnings determinants in the Indonesian labour market.

Income Comparisons, Income Adaptation, and Life Satisfaction: How Robust are Estimates from Survey Data?

Der Theorie nach wird subjektives Wohlbefinden von Einkommensvergleichen und Einkommensanpassungseffekten beeinflusst. Empirische Tests dieser Effekte verwenden oft selbstkonstruierte Messgrosen aus Umfragedaten. Dieser Artikel zeigt, dass Ergebnisse sehr sensitiv gegenuber einfachen Parameterveranderungen sein konnen. Unter Verwendung groser Paneldatensatze aus Deutschland und Grosbritannien zeige ich Falle, in denen plausible Veranderungen der zugrundeliegenden Einkommensart substantiellen Einfluss auf Tests des Zusammenhangs zwischen Lebenszufriedenheit, Einkommensrang, Referenzeinkommen und Einkommensanpassung haben. Modelle die simultan fur Einkommen und Einkommensrang kontrollieren sowie Modelle mit einigen Lags der Einkommensvariable sind anfallig fur imperfekte Multikollinearitat mit entsprechenden Konsequenzen fur Prazision und Robustheit der Schatzer. Forscher sollten bei Tests von relativen Einkommenseffekten darauf achten, dass Referenzeinkommen konstruiert als Durchschnitt einer recht willkurlich definierten Referenzgruppe sowie Referenzeinkommen, das mit einer Lohngleichung des Mincer-Typs prognostiziert wird, zwei Ansatze sind, die inkonsistente Ergebnisse liefern konnen und daher moglicherweise nicht so verlasslich und valide sind, wie bislang angenommen. Die Analyse unterstreicht die Bedeutung von Robustheitschecks und Regressionsdiagnostik - zwei Routineprozesse, die in empirischen Studien oft nicht grundlich durchgefuhrt werden.

Income Comparison, Income Formation, and Subjective Well-Being: New Evidence on Envy versus Signaling

Drawing on the distinction between envy and signaling effects in income comparison, this paper uses 307,465 observations for subjective well-being and its covariates from Germany, 1990-2009, to study whether the nature of income comparison has changed in the process of economic development, and how such changes are related to changes in the nature of income formation. By conceptualizing a person’s comparison income as the income predicted by an earnings equation, we find that, while in 1990-1999 envy has been the dominant concern in West Germany and signaling the dominant factor in East Germany, income comparison was non-existing in 2000-2009. We also find that the earnings equation reflects people’s ability more accurately in the second than in the first period. Together, these findings suggest that comparing one’s income with people of the same ability is important only when ability is insufficiently reflected in own income.

Job-Education Mismatch and Its Impact on the Earnings of Immigrants: Evidence from Recent Arrivals to Canada

Using the most recent Longitudinal Survey of Immigrants to Canada, this paper measures the incidence of job-education mismatch, particularly over-education, examines its determinants, and estimates its impact on the earnings of immigrants. Job-education mismatch is measured using the realized match method, and the corresponding earnings impact is estimated using an over-required-under education technique. Determinants of over-education are examined using a bivariate probit model to account for selectivity into employment. Panel data estimation methods are used to estimate earnings equations and the analysis is stratified by gender. Results show that recent immigrants to Canada have a persistent high incidence and intensity of over-education with a substantial negative impact on their earnings. In particular, two-thirds of recent immigrants to Canada are over-educated with a wage loss of 8%, while an under-educated immigrant loses around 2% on average. Results also show that proficiency in English or French and post-immigration investment in education and training significantly reduce the likelihood of being over-educated. The findings of this study could benefit policies directed to help immigrants integrate in the labour market.

Returns to education and annual income gaps updated in Israel: a quantile regression approach

The study intends to provide some updated empirical evidences on Israel education returns through quantile regression based on the cross-section individual survey data collected in 2009. We analyse gender and ethnicity differentials in the returns to education by using the standard Mincerian earnings equation separately. We obtain estimates displaying higher education returns at the higher quantile and lowest income in lowest quantile. Meanwhile, we use the Oaxaca decomposition to break down the total annual income gap into an explained term due to differences in endowments and an unexplained term due to the discrimination to explore the differences among genders and ethnicities. We find clear evidence that the unexplained annual income differential is higher in upper quantiles of the conditional annual income distribution than in lower quantiles. In order to eliminate the discrimination gap and keep the economy develop sustainably, the identification with different cultures and stratums in Israel must be improved.

The Gender Wage Gap in the Post-Apartheid South African Labour Market

We estimate the gender wage gap for Africans in post-apartheid South Africa over the 2001 to 2007 period. Separate male and female earnings equations yields no significant decline in the conditional wage gap, regardless of whether we correct for selection into the labour force and employment or not. Notwithstanding this, the data appear to reveal a decline in the “explained” proportion of the gap with no significant change in the “unexplained” proportion of the gap. Nevertheless, the “unexplained” proportion or discrimination accounted for 71 percent of the gap in 2007 when using the uncorrected estimates (and the male wage structure as the non-discriminatory norm) thus highlighting the presence, arguably, of substantial discrimination against African women in the post-apartheid South African labour market. We note though that the assumption that the “unexplained” component accounts for discrimination has been criticized for a number of reasons, including the fact that women may self-select into certain types of jobs, the impact of gender-based pre-labour market factors as well as omitted variable bias. Finally, we find that using the either the male or pooled wage structure as the non-discriminatory wage structure provides similar results when undertaking the decomposition. In turn, using the female wage structure results in the harshest results as far as gender discrimination is concerned.

Educational segregation and the gender wage gap in Greece

PurposeThe purpose of this paper is to investigate the extent to which differences in the subject of degree studied by male and female university graduates contributes to the gender pay gap in Greece, an EU country with historically large gender discrepancies in earnings and occupational segregation. In addition, the paper explores the reasons underlying the distinct educational choices of men and women, with particular emphasis on the role of wage uncertainty.Design/methodology/approachUsing micro‐data from the Greek Labour Force Survey (LFS), Oaxaca‐Blinder decompositions are employed to detect the extent to which gender differences in the type of degree studied can explain the male‐female pay gap. “Risk‐augmented earnings functions” are also used to examine the differential wage premiums offered to men and women in Greece in response to the uncertainty associated with different fields of study.FindingsIt is found that the subjects in which women are relatively over‐represented (e.g. Education, Humanities) are also those with the lowest wage returns. Gender differences in the type of degree studied can therefore explain an additional 8.4 per cent of the male‐female pay gap in Greece. A potential reason for distinct gender educational choices is that women opt for less uncertain educations that consequently command lower wage premiums in the job market.Practical implicationsThe findings suggest that the promotion of gender equality in Greece should pay closer attention to removing informal barriers to entry for women in educational fields traditionally chosen by men (e.g. more effective careers advice, work‐experience placements, matching of young girls with professional “mentors”).Originality/valueThe paper is the first to investigate the contribution of individual's field of study to the gender wage gap in Greece. In addition, it includes the first‐ever estimations of “risk‐augmented earnings equations” for that country.

The Formal/Informal Employment Earnings Gap: Evidence from Turkey

In this study, we examine the formal/informal sector earnings differentials in the Turkish labor market using detailed econometric methodologies and a novel panel data set drawn from the 2006-2009 Income and Living Conditions Survey (SILC). In particular, we test if there is evidence of traditional segmented labor markets theory which postulates that informal workers are typically subject to lower remuneration than similar workers in the formal sector. Estimation of standard Mincer earnings equations at the mean using OLS on a pooled sample of workers confirms the existence of an informal penalty, but also shows that almost half of this penalty can be explained by observable variables. Along wage/self-employment divide, our results are in line with the traditional theory that formal-salaried workers are paid significantly higher than their informal counterparts. Confirming the heterogeneity within informal employment, we find that self-employed are often subject to lower remuneration compared to those who are salaried. Moreover, using quantile regression estimations, we show that pay differentials are not uniform along the earnings distribution. More specifically, we find that informal penalty decreases with the earnings level, implying a heterogeneous informal sector with upper-tier jobs carrying a significant premium and lower-tier jobs being largely penalized. Finally, fixed effects estimation of the earnings gap depict that unobserved individual fixed effects when combined with controls for observable individual and employment characteristics explain the pay differentials between formal and informal employment entirely, thereby implying that formal/informal segmentation may not be a stylized fact of the Turkish labor market as previously thought.

IS THERE DISCRIMINATION AMONG BRAZILIAN LAWYERS? A RANDOM-EFFECTS APPROACH

The paper investigates the existence of discrimination amongst lawyers in the private sector of the Brazilian labor market. Using the random-effects approach to estimate earnings equations, combined with the Oaxaca-Ransom (1994, 1999) decomposition methodology, we test the hypothesis that wage differentials amongst lawyers are mostly due to gender discrimination. The econometric evidence shows that with the addition of the specific effects of time in the model, the unexplained share of the Oaxaca-Ransom (1994, 1999) decomposition (attributed to discrimination) is reduced over time comparatively to the share attributed to individual characteristics (endowments). In this context, our results indicate that there is gender discrimination amongst lawyers in Brazil.

Gender Discrimination in the Australian Graduate Labour Market

Email: This paper examines gender discrimination in the Australian graduate labour market, using data from the Graduate Destination Surveys 1999-2009. A framework of analysis provided by the overeducation/required education/undereducation literature is applied. A smaller gender wage gap is found for university graduates than that reported for all workers in earlier studies. It is shown, however, that the gender wage gap widens with the age at graduation. This pattern is argued to reflect the influence of the mismeasurement of actual labour market experience in the conventional education and experience earnings equation on the standardised gender pay gap. Female graduates are less likely to be overeducated, compared to male graduates. Overeducation, while associated with substantial penalties, is not a substantial contributor to the gender wage gap.

The Formal/Informal Employment Earnings Gap: Evidence from Turkey

In this study, we examine the formal/informal sector earnings differentials in the Turkish labor market using detailed econometric methodologies and a novel panel data set drawn from the 2006-2009 Income and Living Conditions Survey (SILC). In particular, we test if there is evidence of traditional segmented labor markets theory which postulates that informal workers are typically subject to lower remuneration than similar workers in the formal sector. Estimation of standard Mincer earnings equations at the mean using OLS on a pooled sample of workers confirms the existence of an informal penalty, but also shows that almost half of this penalty can be explained by observable variables. Along wage/self-employment divide, our results are in line with the traditional theory that formal-salaried workers are paid significantly higher than their informal counterparts. Confirming the heterogeneity within informal employment, we find that self-employed are often subject to lower remuneration compared to those who are salaried. Moreover, using quantile regression estimations, we show that pay differentials are not uniform along the earnings distribution. More specifically, we find that informal penalty decreases with the earnings level, implying a heterogeneous informal sector with upper-tier jobs carrying a significant premium and lower-tier jobs being largely penalized. Finally, fixed effects estimation of the earnings gap depict that unobserved individual fixed effects when combined with controls for observable individual and employment characteristics explain the pay differentials between formal and informal employment entirely, thereby implying that formal/informal segmentation may not be a stylized fact of the Turkish labor market as previously thought.

Estimation of dynamic panel data models with sample selection

SUMMARYWe propose a new method for estimating dynamic panel data models with selection. The method uses backward substitution for the lagged dependent variable, which leads to an estimating equation that requires correcting for contemporaneous selection only. The estimator is valid under relatively weak assumptions about errors and permits avoiding the weak instruments problem associated with differencing. We also propose a simple test for selection bias that is based on the addition of a selection term to the first‐difference equation and subsequent testing for significance of this term. The methods are applied to estimating dynamic earnings equations for women. Copyright © 2011 John Wiley & Sons, Ltd.

The Return to Cognitive Skills in the Australian Labour Market*

The labour market returns to education and cognitive skills are examined using the Australian component of the IALS from 2006. A key feature of the data is the availability of objective measures of literacy, numeracy and problem‐solving skills, along with a rich array of personal and job‐related characteristics. The mean return to an additional year of education is estimated to be 6.2 per cent, almost one‐third of which may be attributed to the acquisition of cognitive skills. Controlling for cognitive skills in the earnings equation has a small effect on the estimated return to labour market experience, while accounting for approximately half of the negative wage gap for immigrants from NESBs. The return to cognitive skills is uniform across quantiles of the conditional hourly earnings distribution. There is strong evidence of credentialism in the returns to education in Australia. A significant component of the ‘sheepskin’ effects in the returns to education is attributable to the higher cognitive skills associated with the completion of a credential.

Skill Level and the Returns to Job-Tenure in Internal Labour Markets in Australia

Both the enterprise and salaried versions of the internal labour market model predict an important role for job specific tenure in the determination of employee earnings. This paper estimates earnings equations using data drawn from the 2005 wave of the Survey of Education and Training Experience (hereafter SETE) to test this idea. The paper finds considerable support for the presence of a job tenure effect, even after controlling for general labour market experience. The paper also seeks to determine if the strength of the tenure effect is related to skill level. The paper finds that the evidence for a tenure effect is strong across the broad spectrum of skill levels, except for the least skilled workers, where the job tenure earnings profile is noticeably flatter. This in turn suggests that internal labour markets have broad relevance across the whole of the skill spectrum, but with somewhat less importance for the least skilled workers.

Educational Spillovers at the Firm Level: Who Benefits from Whom?

This paper examines spillover effects from education at the firm level, separating the effects for different levels and types of education and allowing for a curvilinear relationship. Modeling a Cobb-Douglas production function, we show that wages of tertiary-educated workers depend positively on the number of workers with an apprenticeship degree. These effects are the result of informational spillovers between differently educated workers. We estimate an aggregated Mincerian earnings equation using data from a large employer-employee survey and account for firm fixed effects as well as endogeneous workforce composition. Our results are highly significant and robust throughout our specifications and show that the number of workers with an apprenticeship degree has a positive impact on average wages of tertiary-educated workers but with a decreasing rate.