Econometrica: May, 1980, Volume 48, Issue 4

The Fine Structure of Earnings and the On-the-Job Training Hypothesis

https://doi.org/0012-9682(198005)48:4<1013:TFSOEA>2.0.CO;2-6
p. 1013-1029

John C. Hause

The fine structure of earnings is defined by a theoretically meaningful decomposition of the covariance matrix of earnings (or log earnings) time series. A three-element variance components model is proposed for analyzing earnings of young workers. These components are interpreted as the effects of differential on-the-job training (OJT) and differential economic ability. Several properties of these components and relationships between them are deduced from the OJT model. Background noise generated by a nonstationary first-order autoregressive process, with heteroscedastic innovations and time-varying AR parameters is also assumed present in observed earnings. ML estimates are obtained for all parameters of the model for a sample of Swedish males. The results are consistent with the view that the OJT mechanism is an empirically significant phenomenon in determining individual earnings profiles.