The Economics of Earnings.

Idson, Todd L.

In The Economics of Earnings, Solomon Polachek and W. Stanley Siebert provide a thorough and comprehensive review of the theoretical structure of the human capital labor market paradigm, as well as an extensive review of the basic supporting empirical evidence. Chapters are largely organized into four parts, first, a basic statistical profile of the issue at hand, second, an exposition of the theoretical structure used to analyze the topic, third, an evaluation of key empirical findings, and fourth, a discussion of related policy issues. Throughout the text the discourse integrates not only theory, evidence, and policy within each chapter, but also elucidates how the topics covered in different chapters link together to form a coherent explanation of labor market behavior.

For each topic the core exposition is accessible to readers with little more than a command of rudimentary economic principles, yet progresses to a level of complexity that requires a knowledge of intermediate level theory, elementary calculus, and a basic knowledge of regression analysis. Since much of the formal analytical analysis is confined to appendices, the more general reader may omit this material without losing the flow of the presentation, while at the same time both advanced undergraduates and graduate students will find the technical sections quite informative.

Though the emphasis in the text is on the human capital approach to analyzing such labor market phenomena as earnings differentials, labor supply and mobility behavior, and the demand for labor by firms, topics such as the rationale for long-term contracts, tournament models, efficiency wages, and internal labor markets are also covered in a separate chapter. Transition to these topics from the first part of the text, that develops the basic human capital model, is deftly accomplished by introducing the challenges raised for labor market analysis by consideration of imperfect information--this is done quite well in the context of a clear presentation of basic search theory. It is particularly interesting how the authors integrate these developments into the human capital structure, elucidating the fashion in which they either complement the existing theory or may be seen as extensions of the basic paradigm.

Throughout the text the authors manage to create a sense of ongoing intellectual discovery, involving the reader in the subject as a participant in the unfolding of the paradigm. Chapters tend to begin with the posing of questions that are raised by empirical patterns, and the theoretical material is then introduced as coherent explanations for these patterns. Empirical work is presented less as a survey of extant findings, than as a process of searching for evidence. This approach has substantial pedagogical value in that the development of the empirical implications of the theory acts to draw the reader more deeply into the theoretical explanations themselves, and functions to encourage the facility to critically assess the quality of evidence that has been brought to bear on the theory--this is especially true of discussions of causality, exogeneity, and omitted variable misspecification that permeate the text. The emphasis placed on the critical importance of theory for the design of appropriate social policy, in addition to the drawing out of the empirical implications of labor market theories, constitute two of the major strengths of this book.

While the book admirably covers a wide range of topics in labor market analysis, two rather prominent omissions are dual labor market and job matching theories. Some discussion of the former would potentially be quite valuable since this approach stands largely at variance with the human capital approach. As a result, a section on dual labor markets would not only introduce the reader to an alternative view of how markets for labor operate, but would also provide greater understanding of the human capital model through its comparison to an alternative paradigm. Omission of explicit reference to job matching models is rather surprising, since matching constitutes an integral element of the human capital explanation of wage profiles and mobility behavior, not to mention forming the basis for one strand in the important literature on whether concave wage-tenure profile actually reflect the returns to increases in worker productivity (a topic which is covered in the section of the text on specific training).

Another area that receives scant attention is the treatment of sample selection bias. While selectivity issues are mentioned at a number of points in the text, the topic is never developed in any more then the most general terms. In fact, in the context of union wage differentials while there is a discussion of panel data techniques to control for unobservables, there is no explicit reference to Heckman/Lee statistical techniques for dealing with these problems (similarly, in the context of the labor supply of women, more explicit and extensive treatment of selection issues would greatly enhance the value of the exposition to both students of the subject and the layman). Although the analytics of truncated probability distributions may be a bit above the level of analytical complexity of the text, a simplified and relatively intuitive approach to the subject is not much more difficult than some of the material covered in the appendices on search theory. Since selectivity issues are of great importance to students of labor economics, and also essential for informed assessment of empirical studies and public discourse that cites refuting or supporting statistics for a wide variety of disparate policy initiatives, the book would be greatly strengthened if this topic had been given substantially greater treatment. Finally, one other topic of great current interest that has received extensive attention by researchers, and which aptly represents the application of the human capital approach, is changes during the past decade in the wage structure, and especially the role of skill-biased technological change in generating these changes--this topic would naturally fit in a text on earning determination.

Reservations aside, this book is a masterful synthesis of theory and evidence. It provides a thoughtful and highly readable presentation of the central questions and methodological issues that constitute current day understanding of, and research on, labor markets.