Wage Dynamics with Private Learning-by-doing and On-the-job Search

This paper develops an equilibrium job search model in which the employed worker privately accumulates human capital and continually searches for a better paying job. Firms make wage payment based on both workers’ output and job tenure in order to encourage production and to discourage job turnover. In this environment, wages grow due to human capital accumulation (productive promotion), and the strategic back-loading scheme (non-productive promotion) as well as job-to-job transition. I estimate the model using indirect inference to investigate the effect of human capital accumulation on individual wage growth. In the NLSY79 data, the average wage of white male high school graduates after 20 years of market experience is 1.88 times larger than the average of the first full-time wages. A counterfactual analysis using the structural parameter estimates shows that if a typical worker were not able to accumulate human capital, his wage would grow by 41.8%. JEL Classification: D82, E24, J31, J41 ∗I deeply thank Rasmus Lentz for his guidance. I would also like to thank John Kennan, Yongseok Shin, and Chris Taber for their comments. Xiaodong Fan, Tim Huegerich, Soohyun Oh, and Yuya Takahashi also deserve special recognition. This paper has substantially benefited from frequent discussions with them. Sang Yoon Lee and Michael Rapp helped revise my writing. All remaining errors are mine.