Abstract
This paper stresses the view that earnings differentials should be interpreted in the light of allocation in the labor market. A model is developed that acknowledges the difference between individual levels of characteristics and the levels of such characteristics required in the job. It is applied to data sets for the Netherlands, with education as the most important variable. Neither the individual's education nor the requirements of the job alone are sufficient to determine earnings: they should be considered jointly. The earnings function containing allocation thus proves superior to the function derived from either human capital theory or from segmented labor market theory.
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The present paper has greatly benefitted from many discussions with Professor Jan Tinbergen. Valuable comments by Jules Theeuwes and Glen MacDonald are gratefully acknowledged. Skilfull computer assistance was provided by Gerard Pfann. I also thank the referee.
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Hartog, J. Allocation and the earnings function. Empirical Economics 11, 97–110 (1986). https://doi.org/10.1007/BF01987507
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DOI: https://doi.org/10.1007/BF01987507