American Economic Association

Illusory Wage Differentials: ReplyAuthor(s): Edward P. LazearSource: The American Economic Review, Vol. 74, No. 5 (Dec., 1984), p. 1128Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/578 .

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Illusory Wage Differentials: Reply

By EDWARD P. LAZEAR*

With the exception of a few minor points, I do not disagree with Keith Hylton's com- ment. In fact, I am somewhat puzzled by it because I believe that what Hylton has shown was taken as given in my 1979 paper. That the experience coefficient is not estimated with precision can be inferred directly from the standard error of the wage growth effect. I state explicitly,

We are quick to add, however, that the difference in estimated OJT across the two groups is not large in 1966. In fact, H(1966)ID=1 - H(1966)|D=O = $0.55 (with a standard error of $0.67) so that the difference is relatively small and the standard error is quite large. The con- clusion is then that for this early period, the measured wage differential under- estimates the true differential, but the extent of that understatement is ques- tionable. [p. 559]

It seems to me that Hylton has done little more than document that statement. As such, I agree with his evidence.

The important point, however, is that my argument did not rest on the coefficient ob- tained from one panel, but rather on the difference between the coefficients on the two panels. This point is not addressed in the

comment, but should be. Indeed, now that a few years have passed, there is a better and more direct way to test the validity of my original hypothesis. My method was devel- oped to estimate the value of OJT or wage growth when the entire life cycle of wages could not be observed. But now, there is considerable evidence on the exact shape of the age-earnings profiles for the individuals who were 14-24-years old in 1966. Much more recent waves of the National Longitudi- nal Survey are currently available. This pro- vides a much clearer test of the hypothesis because divergence of the actual profiles can be examined. There is no need to rely on an early extrapolation as I did when only the first few years of the data were available. To my mind, this provides the basis for a more constructive reexamination of the hypothesis. Hopefully, future work (perhaps by Hylton, myself, or both) will proceed along these lines. In any event, I am pleased that others, too, continue to believe that this is an im- portant issue.

REFERENCES

Hylton, Keith, " Illusory Wage Differentials: Comment," American Economic Review, December 1984, 74, 1124-27.

Lazear, Edward P., "The Narrowing of Black- White Wage Differentials is Illusory," American Economic Review, September 1979, 69, 553-63.

*University of Chicago, Chicago, IL 60637. and Na- tional Bureau of Economic Research.

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