Knowledge that Transforms

This article reports nonparametric estimates of the effect of labor-supply behavior on the payments to families enrolled in the Seattle/Denver Income Maintenance Experiment. The randomized assignment of families to the treatment groups in this experiment was designed to permit the calculation of these nonparametric estimates. However, the nonparametric estimates have never been reported, even though they are easy to construct using a simple weighting procedure. Unfortunately, responses to the data collection instrument (which depended on costly surveys) were not random, and this opens up some ambiguity in the results.

A firm will typically gather information concerning its own workers that is not available to other potential employers, while other firms will attempt to reduce this information asymmetry by observing the actions of the initial employer. I argue that this process can be important in environments characterized by up-or-out contracts in that the retention decision can serve as a signal of productivity. The article investigates this argument in an environment where up-or-out contracts are employed because they provide workers with an incentive to accumulate general human capital and where learning takes place in a diffuse fashion.

Human capital models have mainly focused on the rate of return to investment in a homogeneous stock of capital. Yet individuals have different initial attributes that determine comparative advantage in producing different types of human capital. We find that mathematical ability is an important determinant of field choice for college students and that differences in earnings across fields are largely explained as a return to the use of scarce quantitative abilities in the production of each type of human capital. The model successfully accounts for the observed male-female differences in earnings and occupational choices of recent college graduates.

A new data set covers chief executive officers (CEOs) of large commercial banks over the period 1982-87. For newly hired CEOs, the elasticity of pay with respect to assets is about one-third. For continuing CEOs, the change in compensation depends on performance, as measured by stock and accounting returns. The sensitivity of pay to performance diminishes with experience, but the returns are not filtered for peer-group returns. Logit regressions relate the probability of CEO departure to age and performance, as measured by stock returns filtered for peer-group returns; CEO experience does not influence this relationship.

Much of the male-female wage differential exists because men and women are assigned to different jobs. Within narrow job categories, there is no male-female differential. Only a tortured taste theory of discrimination can reconcile these facts. We argue that differential movement along job ladders entails comparative advantage, so the ability standard for promotion is higher for women. This implies that more able women will be passed over in favor of less able men. Women, assumed to have the same ability distribution as men, earn less. The differential reflects females' lower promotion probability, not within-job discrimination.

The "job-stopping" process of older workers often includes some combination of postcareer "bridge" employment, partial retirement, and reverse retirement. Fewer than two-fifths of household heads retire directly from career jobs, over half partially retire at some point in their working lives, and a quarter reenter the labor force after initially retiring. In addition, postcareer employment is frequently located outside the industry and occupation of the career job, and there are important differences in postcareer labor force experiences by gender, permanent income, and career-job pension status.

The "human capital earnings function," in which earnings are expressed as a quadratic in potential experience, is probably the most widely accepted empirical specification in economics. In spite of its widespread acceptance, the human capital earnings function provides a very poor approximation of the true empirical relationship between earnings and experience. The standard formulation understates early career earnings growth by about 30%-50% and overstates midcareer growth by 20%-50%. However, simple alternative specifications that fit the data are available.