A new and easily implementable framework for the empirical analysis of the relationship between aggregate and individual wages is developed. Aggregate real wages are shown to contain three important bias terms: one associated with the dispersion of individual wages, a second deriving from compositional changes in the (selected) sample of workers, and a third reflecting the distribution of working hours. Their importance for interpreting the path of aggregate wages and of the returns to education for recent experience in Britain is highlighted. A close correspondence between the estimated biases and the patterns of differences shown by aggregate wages is established.
Authors
Richard Blundell
Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.
Howard Reed
Thomas M. Stoker
Tom is a Gordon Y Billard Professor of Economics at MIT and an International Fellow of IFS. He is a leading researcher in a new field of theory called semi-parametric econometrics, which combines traditional economic models with flexible statistical techniques and has recently applied these methods to studying worldwide carbon monoxide emissions, household gasoline demand, British unemployment, and productivity in U.S. coal mining.
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