Comparative Advantage, Learning, and Sectoral Wage Determination

Abstract

We develop a model in which a worker’s skills determine the worker’s current wage and sector. The market and the worker are initially uncertain about some of the worker’s skills. Endogenous wage changes and sector mobility occur as labor market participants learn about these unobserved skills. We show how the model can be estimated using nonlinear instrumental variables techniques. We apply our methodology to study wages and allocation of workers across occupations and industries using individual‐level panel data from the National Longitudinal Survey of Youth. We find that high‐wage sectors employ high‐skill workers and offer high returns to workers’ skills.