What are the sources of rapid wage growth during a worker's early career? To address this question, I construct and estimate a model of strategic wage bargaining with on-the-job search to explore three different components of wages: general human capital, match-specific capital, and bargaining position. Workers search for alternative job opportunities on the job and accumulate human capital through learning-by-doing. As the workers find better job opportunities, the current employer has to compete with outside firms to retain them. This between-firm competition improves the outside option value of the worker, which results in wage growth on the job even when productivity remains the same. The model is estimated by a simulated minimum distance estimator and data from the NLSY 79. The parameter estimates are used to simulate counterfactuals. Through these simulations I find that only 60% of the observed wage growth reflects the accumulation of general human capital. The growth match-specific capital through job changes accounts for about 20%. The improved bargaining position explains the remaining 20% of the wage growth. The results suggest that labor market frictions explain a larger part of wage growth than previously considered in the literature.
The Eighth ISER-Moriguchi Prize (2006) Awarded Paper.