Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/20734
Authors: 
Munasinghe, Lalith
Sicherman, Nachum
Year of Publication: 
2004
Series/Report no.: 
IZA Discussion paper series 1436
Abstract: 
A large fraction of the variation in wage levels and wage growth rates among individuals remains unexplained. Economists argue that ?unobserved? heterogeneity is among the more likely reasons for this unexplained variation in wages. The source of individual heterogeneity is typically attributed to data limitations and the unobservability of certain productivity related factors. In this paper we present a theory of career choice and derive a discriminating test between two inherently unobservable sources of heterogeneity – learning ability and workers? inter-temporal preferences (discounting) – both of which can clearly account for the variation in wage levels and wage growth rates. We apply this test to the large observed differences in wages and wage growth rates between smokers and non-smokers. The empirical evidence suggests that smoking is a proxy for individual discount rates.
Subjects: 
wage dynamics
unobserved heterogeneity
discount rates
learning ability
JEL: 
J31
J24
J22
Document Type: 
Working Paper

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