Can the Human Capital Approach Explain Life-Cycle Wage Differentials between Races and Sexes?

By Wu, Huoying | Economic Inquiry, January 2007 | Go to article overview
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Can the Human Capital Approach Explain Life-Cycle Wage Differentials between Races and Sexes?

Wu, Huoying, Economic Inquiry


The trends in gender and racial wage gaps have continued to receive the attention of researchers and policy-makers due to their mounting social significance. Substantial literature concludes that after World War II, the black-white pay gap shrank rapidly until the mid-1970s. This trend was reversed in the 1980s (Card and DiNardo 2002; Couch and Daly 2002; Darity and Myers 1998; O'Neill 1990; Smith and Welch 1989). (1) In contrast, the gender pay gap persisted for four decades after World War II. Only in the 1980s did it start to narrow. Yet, it showed only a little progress in the 1990s (Blau, Ferber, and Winkler 2002; Goldin 1990; O'Neill 2003).

Although a large number of studies have been purported to investigate the sources of male-female and black-white pay gaps, most have not addressed the issue of whether or not the individuals being observed have changed their economic status over their lifetimes. The major problem is that longitudinal data are not available over a long enough period to determine the age-earnings profiles. (2)

By using the National Longitudinal Survey of Youth data-1979 cohort, (NLSY79) this paper examines gender and racial wage gaps among individuals of the same age in an effort to eliminate major life-cycle differences, while at the same time tracking the changes in the wage gaps over their life spans. In particular, we would like to provide answers to the following questions: What factors can account for the narrowing (widening) gender wage gaps among blacks (whites) as they age? Can the observed life-cycle wage gaps be attributed to different paths of postschool human capital accumulation?

Since today's individuals, regardless of race or sex, have on average completed similar years of schooling among the youth cohort, the observed disparity in wages between races and sexes may simply reflect the differences in the quality of schooling, family background, and postschool investment. (3) Given that school quality and family background are essentially fixed for an individual as he or she ages, in order to address the questions above, this paper attempts to further examine the differences in postschool human capital investment behavior among individuals.

Past estimates of the structural parameters for the model of postschool human capital accumulation have, however, not been fruitful (BenPorath 1970; Brown 1976; Haley 1976; Heckman 1976a, 1976b; Rosen 1976). The major reasons, as Heckman (1976b) points out, are that dynamic models are difficult to solve explicitly and that the proportion of time spent investing in on-the-job training cannot be measured directly. Moreover, to fulfill the dynamic concepts of human capital accumulation, longer period longitudinal data must be used to explore the life-cycle view of individual wages. (4)

The lack of empirical investigation in relation to the continuous-time dynamic model using panel data therefore leads us to develop an alternative empirical version for estimating the structural parameters of the wage function over a lifetime. In other words, the purpose of our study is to estimate a dynamic structural model based on the theory of optimal human capital accumulation. In accordance with this theory of human capital, the wage and its life path can be viewed as the outcome of an optimal path of human capital investment over an individual's life cycle. Instead of comparing the differences in the outcome of this optimization process (i.e., wages), we estimate the key parameters in determining the life-cycle wage path as well as further empirically identifying the sources of the wage gap.

Our empirical results first suggest that the male-female wage gap mainly arises from gender difference in the marginal costs of human capital production. As men in general spend more time in the labor market and gain more work experience than women, they tend to have lower marginal costs in the process of human capital production.

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Can the Human Capital Approach Explain Life-Cycle Wage Differentials between Races and Sexes?


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