NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Theories of the Distribution of Labor Earnings

Derek Neal, Sherwin Rosen

NBER Working Paper No. 6378
Issued in January 1998
NBER Program(s):   LS

Several empirical regularities motivate most theories of the distribution of labor earnings. Earnings distributions tend to be skewed to the right and display a long right tail. The are leptokurtic (positive fourth cumulant) and have a fat tail. Mean earnings always exceed median earnings and the top percentiles of earners account for a disproportionate share of total earnings. Mean earnings also differ greatly across groups defined by occupation, education, experience, and other observed traits. With respect to the evolution of the distribution of earnings for a given cohort, initial earnings dispersion is smaller than the dispersion observed in prime working years. We explore several classes of models that address these stylized facts. Stochastic theories begin with distributional assumptions about worker endowments and then examine the stochastic structures that might generate observed features of the aggregate distribution of earnings. Selection models describe how workers allocate their skills to tasks. Because workers choose their best option from a menu of careers, these allocation decisions generate earnings distributions which tend to be skewed. Sorting models provide dynamic versions of selection models and illustrate how gradual learning about endowments leads to sorting patterns that amplify dispersiion and generate a skewed distribution of earnings within a cohort of experienced workers. Human capital theory demonstrates that earnings dispersion is a prerequisite for significant skill investments. Without earnings dispersion, workers would not willingly make the investments necessary for high-skill jobs. Human capital model illustrate how endowments of wealth and talent influence the investment decisions that generate observed distributions of earnings.

download in pdf format
   (2433 K)

email paper

This paper is available as PDF (2433 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6378

Published: (Published as "The Theory of Earnings Distributions") Handbook of Income Distribution, Atkinson, A. and F. Bourgignon, eds., North Holland, 2000.

Users who downloaded this paper also downloaded these:
Scitovsky A Survey of Some Theories of Income Distribution
Rosen and Sanderson w7573 Labor Markets in Professional Sports
Mincer Education, Experience, and the Distribution of Earnings and Employment: An Overview
Reder A Partial Survey of the Theory of Income Size Distribution
Mincer The Human Capital Earnings Function
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us