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GOLDSMITH Et Al-1997-Economic Inquiry
GOLDSMITH Et Al-1997-Economic Inquiry
GOLDSMITH Et Al-1997-Economic Inquiry
CAPITAL ON WAGES
ARTHUR H. GOLDSMITH, JONATHAN R. VEUM, and WILLIAM DARITY, JR.*
8 15
Economic Inquiry
(ISSN 0095-2583)
Vol. XXXV, October 1997, 815-829 OWestern Economic Association International
816 ECONOMIC INQUIRY
Recently, however, psychologists have de- sult is evidence that an individual’s real wage
veloped and validated measures of various is more sensitive to a change in self-esteem
components of psychological capital making than to comparable alterations in human cap-
it possible to “observe the unobservable.” ital. In addition, achievements that contribute
Some of these measures are available in the to real wages, including the acquisition of
N a t i o n a l L o n g i t u d i n a l S u r v e y of Youth some forms of human capital, are important
(NLSY). These measures make it possible to determinants of self-esteem. A person’s self-
control directly for some aspects of person- esteem also depends upon their relative wage.
specific heterogeneity in wage equations here- Concluding remarks appear in section VI.
tofore unaccounted for. Therefore, using data
drawn from the NLSY, this paper offers esti- II. PSYCHOLOGICAL CAPITAL AND WAGES
mates of the impact of both psychological and Neoclassical theory predicts that a profit-
human capital on real wages. maximizing firm will pay workers a wage
The relationship between psychological equivalent to their marginal product. Most
capital and wages is captured in two ways. economists believe a person’s human capital
First, we offer direct evidence on the influ- is the primary determinant of personal produc-
ence of self-esteem on wages. Because self- tivity. In practice, human capital generally is
esteem reflects a wide range of personal attri- treated as job-related skills and physical
butes, it accounts for many dimensions of psy- health (Grossman [1972]). Of course, the
chological capital. Theories of self-esteem quantity and quality of a person’s work may
formation advanced by psychologists suggest depend on their psychological capital as well.
that wages and self-perception are determined A person’s psychological capital is likely to
jointly. Guided by this literature, we estimate govern their motivation and general attitude
a person’s level of real wages and self-esteem toward work. Indeed, Erikson [ 19591, founder
simultaneously. Second, psychologists expect of the life span development theory, argued
a person’s general outlook on life, a compo- that individuals who were psychologically
nent of psychological capital referred to as healthy-those with high self-esteem-would
“locus of control,” to play a central role in be the most productive.
shaping a person’s conception of self. We Following Rosenberg [ 19651, psycholo-
offer evidence on whether this element of psy- gists treat self-esteem as multidimensional,
chological capital directly influences self-es- comprising notions of worth, goodness,
teem and, thus, contributes indirectly to health, appearance, and social competence.
wages. Deficits in one area can be overcome by
The explicit inclusion of both psychologi- strengths in another. Since self-esteem may be
cal and conventional human capital variables changed by events people experience, com-
in the wage equation allows us to evaluate the parisons they make, or evaluations conducted
relative contributions of human and psycho- by others, it is best thought of as a feature of
logical capital to real wages. This unique anal- personality, rather than a trait-the latter a
ysis fosters new insights into the determinants stable and enduring property of the individual.
of personal productivity. The broad scope of factors contributing to
This paper is organized as follows. In sec- self-esteem allows it to capture many features
tion I1 we discuss the rationale for a relation of a person’s psychological capital.
between productivity and self-esteem. In sec- Brockner [ 19881 found self-esteem influ-
tion I11 we describe and evaluate the measure- enced productivity positively in two ways.
ment of psychological capital. Section IV dis- First, managers perceived that high self-es-
cusses our empirical procedures, including teem workers tend to use their time more ef-
data, model specification, and estimation fectively. The latter needed less direction
technique. Our findings on the relation be- from supervisors, leading to shorter periods of
tween a person’s real wage and their levels of “down time.” Second, workers high in self-es-
psychological and human capital are pre- teem exercised a more efficient use of group
sented in section V. time by exhibiting a willingness to consider a
We find that psychological capital, as well wider range of solutions to problems; and they
as human capital, affects real wages both di- were more confident decision makers. These
rectly and indirectly. However, a striking re- characteristics led to groups with high levels
GOLDSMITH, VEUM, & DARITY PSYCHOLOGICAL CAPITAL & WAGES 817
of cooperation and groups less inclined to tal health significantly reduces an individual’s
seek guidance from managers. earnings.
Psychologists believe that a person’s gen- In these papers, a person’s mental health
eral outlook on life, their locus of control, in- status is treated as an exogenous determinant
fluences self-esteem. Individuals who think of personal productivity and wages. The pos-
they are masters of their own fates and believe sibility that emotional well-being also may be
they are responsible for what happens to them influenced by wages is not formally ex-
are called internalizers by psychologists. Ex- plored.* However, poor mental health is likely
ternalizers believe their life is controlled by to damage self-esteem, leading to a decline in
outside forces and that they bear little respon- productivity and wages that may in turn erode
sibility for what happens to them. Psycholo- a person’s perception of self.
gists (Glietman [1991]; Rotter [1966]) con- Recent developments in the measurement
sider locus of control to be a personality trait, of psychological capital make it possible for
a stable feature of self, formed early in life. economists to examine more fully the relation
Lefcourt [ 19821 and Bandura [ 19861 suggest between personality and wages. Moreover,
that individuals who believe they are in con- these advances make it possible to explore the
trol of situations they face, those with an in- reciprocal influences of psychological capital
ternal locus of control, are likely to possess a and real wages. The following section dis-
strong sense of self-worth relative to ex- cusses how psychologists measure two ele-
ternalizers-who tend to doubt their personal ments of a person’s psychological capital,
efficacy. Hence, while locus of control may self-esteem and locus of control, and indicates
affect labor market outcomes, it appears to do why economists should find these measures
so through its impact on more time-variant useful in their empirical work.
psychological variables. As a result, locus of
control is an element of psychological capital Ill. MEASURING PSYCHOLOGICAL CAPITAL:
METHODS AND VALIDITY
that is expected to influence wages, but only
indirectly through its effect on self-esteem. Rosenberg [ 19651 developed an inventory
Psychologists (Lane [ 199 11; Glietman of questions to measure an individual’s
[ 19911) also expect wages to enhance self-es- “global” self-esteem, and Rotter [ 19661 con-
teem, contingent upon the manner in which structed a survey instrument to gauge an
self-esteem is derived. Self-esteem may be individual’s “locus of control.” These scales,
achieved, through actions leading to a height- contained in the NLSY, are constructed from
ened sense of self, or ascribed, due to the pos- seif-reported evaluations collected as re-
session of certain characteristics valued by so- sponses to survey questions.
ciety (e.g., being Protestant, wealthy, attrac- Economists have been reluctant to use sub-
tive). Therefore, success in the labor market, jective data because of their concerns over
as measured by the wage a person commands, variable measurement error, their aversion to
is likely to contribute directly to a positive making interpersonal comparisons using such
perception of self. Heretofore, the possibility data, and their lack of familiarity with psy-
that real wages and self-esteem are inter- chological scales (Easterlin [1974]). In con-
dependent has been unrecognized by econo- trast, psychologists believe these problems
mists. can be overcome and that variations in these
It certainly is plausible that a link exists scales across individuals can help explain ob-
between psychological capital and personal served differences in individual behavior and
productivity, as well as a connection between outcomes. We turn now to a brief discussion
real wages and self-esteem. Since most econ- of the issues raised by economists, and the
omists have operated under the belief that psy- procedures adopted by psychologists that ad-
chological constructs are unmeasurable, gen- dress these concerns.
erally they have not examined whether such
associations exist. Rare exceptions include re- 2. Mullahy and Sindelar [I9931 and Frank and Gertler
search on the relation between mental health [ 19911 discuss the issue of causality between labor market
and wages by Bartel and Taubman [1979; outcomes and mental health. They also note that poor men-
tal health may make skill acquisition more costly, leading
19861, Frank and Gertler [1991], and Mullahy to lower skill productivity and wage levels among the men-
and Sindelar [ 19931 indicating that poor men- tally ill.
818 ECONOMIC INQUIRY
Economists are predisposed to say subjec- scales, each yielding a single measure repre-
tive interpersonal comparisons are pointless. sented on a two-point (0,l) scale.3 Therefore,
For instance, individuals might “anchor” their the Rosenberg measure of self-esteem ranges
scale at different levels, making interpersonal in value from 0 to 6, with a higher value rep-
comparison of responses meaningless. Psy- resenting a greater level of self-esteem.
chologists assert that the “anchoring” issue Even if measures of psychological con-
can be addressed by careful construction of structs can be designed to permit meaningful
the questions contained in a scale used to rep- interpersonal comparisons, economists also
resent a psychological construct. have expressed skepticism about the accuracy
Consider, for example, the construction of of constructs purporting to measure compo-
Rosenberg’s Self-Esteem Scale (SES). The nents of a person’s psychological status such
scale contains ten questions that are used to as self-esteem and locus of contr01.~Likewise,
measure self-esteem as defined by Rosen- many psychologists initially were uneasy
berg-a favorable or unfavorable attitude to- about the precision of these measures. How-
wards oneself (Rosenberg [ 1965, 151). A four- ever, studies reveal that scales designed to
point Likert-style responses format (strongly gauge an individual’s self-esteem and locus of
agree, agree, disagree, strongly disagree) control are e f f e ~ t i v ePsychologists
.~ assess the
accompanies each question, but responses are usefulness of scales developed to measure a
typically scored only as agreement or dis- psychological construct by examining three
agreement, resulting in a two point (0,l) re- features of the scale: convergent validity, re-
sponse. This procedure has been adopted by liability, and stability.
investigators because where a person “an- Convergent validity is concerned with
chors” their scale is more likely to influence whether an alternative scale seeking to mea-
their intensity of agreement with a statement sure the same construct yields a similar as-
than whether they agree in principle with the sessment. For instance, would a person rated
statement . as high in self-esteem using Rosenberg’s Self-
Two people with identicaI reactions to a Esteem Scale score correspondingly high on
statement may evaluate the strength of their Coopersmith’s Self-Esteem Inventory or the
reaction differently, one claiming to “agree” Lerner Self-Esteem Scale? A scale is reliable
with the statement and the other agreeing when the questions that comprise the scale are
“strongly.” Therefore, a scale based on sub- all probing similar or related features of the
jective strength of concordance with a remark individual’s make-up. If there is a high corre-
is likely to be of little use in analyzing behav- lation between responses on each scale item,
ior across individuals. However, if the scale as reflected by a high Cronbach a,the scale
is constructed using impressions of agreement is regarded as reliable. Finally, a scale is only
or disagreement with a series of remarks, the considered stable if a similar assessment is
issue of “anchoring” is less problematic. generated by administering the same scale a
Rotter’s [ 19661 Internal-External (I-E) short time in the future. Two weeks is a com-
Locus of Control Scale consists of 23 question mon interval to retest for purposes of exam-
pairs. Internal statements are paired with ex- ining stability.
ternal statements. Again, to reduce measure- Silber and Tippett [ 19651, Crandall [ 19801,
ment error caused by different “anchor” Demo [1985], and Reynolds [1988] found
points, individuals are asked to reveal which
of the widely divergent descriptive statements
corresponds to their perception-not the ex-
3. Crandall [I9801 found little difference between
tent of the concordance. One point is given using the SES scored by summing the response to each
for each internal statement selected. Scores on question on a four-point scale, giving a scale range of
the I-E can range from 0 (most external) to 23 10110, or as a Guttman scale resulting in a range from
06.
(most internal). 4. Easterlin [1974] and Freeman [1978] give excellent
Rosenberg’s SES also was designed origi- accounts of measurement issues associated with subjective
nally as a Guttman-type scale where a larger response data.
pool of items is reduced through the grouping 5. Robinson and Wrightsman [1991], and Robinson
of questions. Following Rosenberg, the ten and Shaver [1980] offer an excellent description and psy-
chometric evaluation of measurement instruments for the
questions have been used to construct six sub- full range of psychological constructs.
GOLDSMITH, VEUM, & DARITY PSYCHOLOGICAL CAPITAL & WAGES 819
TABLE I
Variable Names, Definitions, and Sample Means
1980 DATA 1987 DATA
Wage Self-Esteem Wage Self-Esteem
Equation Equation Equation Equation
Variable Means Means Means Means
Name Variable Definition (std. dev.) (std. dev.) (std. dev.) (std. dev.)
Wage Natural log of hourly wage on 1.45 1.91
current/most recent job (.37) ~52)
Wage Hat Predicted value of the natural log of 1.06 1.85
hourly wage t.41) C33)
High Wage 1 if a person’s Wage Hat is more than .I7 .17
one standard deviation > mean Wage (.37) (.38)
Hat for the sample, 0 otherwise
Low Wage 1 if a person’s Wage Hat is more than .21 .17
one standard deviation < mean Wage ~41) (.38)
Hat for the sample, 0 otherwise
Sef-Esteem Product of the score on to the six 3.69 5.32
subscales constructed from Rosenberg (1.27) (.96)
Self-Esteem Inventory
Self-Esteem Hat Predicted value of the product of the 3.69 5.32
score on the six subscales constructed (.47) (.3 1)
from Rosenberg Self-Esteem Inventory
Education Years of education completed 11.39 11.05 12.07 12.52
(1.67) (1.85) (2.24) (2.27)
Experience Weeks worked since 1978 77.99 61.89 274.94 253.78
(2 8.30) (36.700) (1 26.49) (135.65)
Tenure* Weeks of continuous work with current 56.57 126.68
employer (44.5 2) (1 28.73)
AFQT Score on the Armed Forces Qualifying 64.45 60.12 65.23 63.28
Test (2 1.52) (22.20) (21.68) (22.20)
SMSA 1 if live in SMSA, 0 otherwise .68 .68 .78 .77
(.46) (.47) (.41) (.42)
Unemployment County unemployment rate 6.99 7.06 7.10 7.18
(2.21) (2.19) (2.55) (2.58)
Locus of Control Sum of the response to the four Rotter 2.57 2.46 2.53 2.50
questions (1.07) (1.06) (1.04) (1.05)
Male 1 if male, 0 otherwise .5 1 .46 .5 1 .47
(.sot (30) (50) (30)
Black 1 if black, 0 otherwise .18 .22 .26 .27
(.39) ~41) (.44) (.44)
Age Age 20.56 20.42 25.85 25.86
(1.41) (1.51) (2.26) (2.26)
Married I if married, 0 otherwise .32 .34 .44 .44
L47) (.47) (.50) (50)
Kids 1 if respondent has a child in the .22 .33 .42 .46
household, 0 otherwise (.42) (.47) (.49) (.50)
Wealth Value of household wealth/1.000 10.87 10.26 10.90 10.87
(12.70) (1 1.20) (15.75) (15.52)
Professional 1 if occupation of either parents in .I6 .14 .21 .20
Parent household at age 14 was professional or (.37) (.35) (.41) ~40)
manager, 0 otherwise.
Both Parents 1 if both parents lived in household .71 .69 .69 .67
when respondent was 14, 0 otherwise. (.45) (.46) (.46) (.47)
Parent Education Average highest grade completed by 10.51 10.33 11.10 10.94
respondent’s parents. (2.69) (2.67) (2.85) (2.91)
Religion 1 if affiliated with any religious group, .85 .84 .95 .95
0 otherwise. (.35) (.37) (-21) (.21)
Selection Selection control variable. .64 .26
(.51) (.28)
Number of
Observations 1411 2225 6911 8132
822 ECONOMIC INQUIRY
TABLE I1
Frequency Distributions for Self-Esteem in 1980 and, 1987, and Trait Locus of Control
Measured in 1979 for the Samples in 1980 and 1987
Self-Esteem Self-Esteem Locus of Control Locus of Control
1980 1987 1980 Sample 1987 Sample
Score Range Number Percent Number Percent Number Percent Number Percent
~~
0 3 0 2 0 83 4 246 3
1 69 3 39 0 328 15 1181 1s
2 349 16 106 1 684 31 2480 30
3 544 24 30 1 4 741 33 2698 33
4 704 32 918 11 3 89 17 1521 19
5 337 15 2127 26
6 219 10 4639 57
Number of
Observations 2225 100 8132 100 2225 100 8132 100
scores on the Armed Forces Qualifying Test families where Both Parents are present, Par-
(AFQ7‘). General and specific workplace ent Education is greater, a Professional Parent
skills are represented by Experience and Ten- resides, and there is an affiliation with a Re-
ure, respectively. ligion.
The Xivector contains variables describing Wages are observed only for those individ-
a person’s work environment. It includes uals working for pay (1,411 of the 2,225 ob-
dummy variables for Occupation and Industry servations in the 1980 data, and 6,911 of the
of employment, size of the local labor market 8,132 observations in the 1987 data). Heck-
(SMSA), and local labor market conditions as man [ 19791 has suggested that unobservable
represented by the area-specific Unemploy- characteristics of the individual both govern
ment rate. a person’s decision about whether or not to
The vector Y,. contains demographic infor- participate in the labor force and their produc-
mation and measures of personal characteris- tivity if they opt to work. If these factors are
tics, aside from human and psychological cap- omitted from the estimated equation, then the
ital, that are expected to influence personal estimated coefficients will suffer from selec-
productivity or result in work-related con- tivity bias. Following Heckman a selection-
straints. Demographic factors taken into ac- correction variable (Selection) is included in
count include gender (Male), race (Black), equation (1) to control for labor force partic-
Age, marital status (Married), presence of ipation.
young dependents (Kids),and financial wealth Aperson’s self-esteem level, Si,is expected
(Wealth). to be governed by equation (2). Achievements
Families and significant others are the such as the accumulation of human capital and
agents that socialize youths, affecting the evo- success in the labor market are expected to
lution of their sense of self-esteem. These in- contribute positively to a person’s perception
teractions also may contribute to the forma- of self. Wages are a commonly used standard
tion of values and attitudes, not fully captured for gauging economic success. Absolute
by self-esteem, that influence subsequent pro- wages and relative wages are expected to in-
ductivity. The vector Y,. contains variables to fluence a person’s perception of self. Receiv-
account for the possible role of a person’s ad- ing a greater real wage, given a position in
olescent youth environment in generating the wage distribution, should enhance an
such individual-specific heterogeneity. So- individual’s self-esteem: In forming an opin-
cialization leading to greater subsequent pro- ion of self a person also may care about their
ductivity and wages is presumed to occur in compensation relative to others.
GOLDSMITH, VEUM, & DARITY PSYCHOLOGICAL CAPITAL & WAGES 823
A person earning a “high” wage level rel- Intact families, with well-educated and
ative to others, for a given absolute wage rate, professional parents affiliated with a religious
is expected to exhibit greater self-esteem. organization, are expected to provide a foun-
Those receiving “low” hourly pay in compar- dation yielding a more positive perception of
ison to others are likely to possess a lower self in their offspring. Having a spouse, chil-
level of self-esteem. The vector Wicontains dren, and greater financial wealth, is expected
two variables, High Wage and Low Wage, to to enhance a person’s self-esteem. Socializa-
identify where an individual is located in the tion patterns are likely to reduce self-esteem
wage distribution.1° for women relative to men. Discrimination
Demographic characteristics and personal can be expected to harm a person’s self-es-
attributes expected to affect a person’s self- teem.
esteem are elements of the vector 2,. All the Wage appears in the self-esteem equation
variables contained in Yiare included in Zi, ( 2 ) , and Self-Esteem is included in the wage
plus a measure of a person’s Locus of Control. equation (1) to account for their joint deter-
Individuals who possess a more internal locus mination. Self-esteem is independent of cur-
of control are likely to have greater self-effi- rent labor market conditions (represented by
cacy-a belief they can accomplish tasks. Fol- SMSA and Unemployment) which are ex-
lowing Bandura [ 19861, persons with stronger pected to affect wages. As a result, these vari-
self-efficacy are expected to possess a more ables are used to identify the self-esteem
favorable view of self. Thus, holding a more equation, equation ( 2 ) . A person’s locus of
internal locus of control is expected to con- control is expected to exert a direct influence
tribute to greater self-esteem. Does better self- on their self-esteem while only indirectly ef-
esteem lead a person to be more internal in fecting their wage, through its impact on self-
their outlook, resulting in joint determination esteem. Because the locus of control is in-
of these two components of psychological cluded in the self-esteem equation, but is ex-
capital? cluded from the wage equation, it identifies
Psychologists such as Rosenberg [ 19651 the wage equation.
believe self-esteem fluctuates over a person’s
life-cycle in response to experiences. How- Estimation Technique
ever, the foundation upon which a person Two-stage least squares (2SLS), is used to
evaluates themselves is developed as a youth. estimate equations (1) and ( 2 ) . In the first
An important component of this foundation is stage each endogenous variable is regressed
a person’s locus of control that is established on all of the exogenous variables in the system
early in life and is relatively time invariant. by OLS. Using the coefficient estimates from
Factors causing adjustments in self-esteem are the reduced-form equations, estimated values
not expected to alter a trait-like feature of per- of the endogenous variables-instruments-
sonality molded as a youth. Therefore, we are created.” In Stage I1 these estimated val-
treat locus of control as an exogenous deter- ues, of w iand Si,denoted as Giand ki respec-
minant of self-esteem. tively, which are uncorrelated with the distur-
bance terms, replace the endogenous variables
in structural equations (1) and ( 2 ) . The struc-
10. A person was presumed to earn a relatively high tural equations are then estimated by OLS and
(low) wage if their wage was more than one standard de- ordered probit respectively, an appropriate
viation above (below) the mean wage for the entire sample. procedure when the dependent variable is cat-
The authors wish to thank a referee for this journal for
suggesting a specification of equation (2) in which relative, egorical and sequential, such as our Rosen-
as well as absolute, wages are hypothesized to influence a berg measure of self-esteem, and when errors
person’s self-esteem. To avoid simultaneous equations bias
the predicted wage is used in the structural self-esteem
equation, thus predicted wages are used to define a person’s 11. It might be argued that using a nonlinear estimation
position in the wage distribution. We also utilized dummy technique is more appropriate given that self-esteem is a
variables to represent a person’s position in the wage dis- noncontinuous dependent variable. However, predicted
tribution for the occupation in which they are working or means and actual means can vary substantially using non-
last worked. Estimating the structural wage equation with linear methods. Fortunately, the coefficients from an OLS
these dummy variables provided weaker support for the estimation, which are used to create the predicted values,
hypothesis that relative wages influence self-esteem. These are consistent; only the standard errors are inconsistent.
estimates are not reported in Table 111 but are available See Heckman [I9781 for a detailed discussion of these
from the authors upon request. points.
824 ECONOMIC INQUIRY
are assumed normally distributed (Maddala Thus, the self-esteem equation is identified
[ 19831). both theoretically and empirically.
V. RESULTS Studies by O’Neill [ 19901, Ferguson
The results for the structural wage equation [1993], Maxwell [1994], and Neal and John-
appear in Table I11 along with estimates of the son [ 19961 using the NLSY find that when the
sensitivity of the wage rate to changes in AFQT is included in the wage equation as a
human capital and self-esteem. Table IV pres- measure of basic skills, the gap between white
ents our estimates of the structural self-esteem and black wages declines dramatically. More-
equation. over, Neal and Johnson [ 1994, 91 report that
results using the wage “as the dependent vari-
Wages able, show small statistically insignificant
race differences in wages for either sex when
Self-esteem, a broad measure of psycho-
AFQT is included.” They conclude that the
logical capital, is positively and significantly
racial wage differential is largely due to a ra-
related to the real wage for each of the data cial skill differential-not di~crimination.’~
sets. The coefficient estimates on each of the
However, their model suffers from omitted
four different types of human capital (Educa-
variable bias, and the omitted variable, psy-
tion, Tenure, Experience, AFQT), are positive chological capital, is jointly determined with
and significant fcir the data set primarily com- their dependent variable. When the joint de-
posed of people at a very early stage of their
termination of wages and psychological capi-
working life-cycle, and for the data set con- tal is taken into account explicitly, we find
taining more mature individuals.
that blacks with comparable skill characteris-
A striking result is evidence that an
tics earn significantly less than whites.
individual’s real wage is more sensitive-
Males earn significantly higher wages than
based on elasticities calculated at the sample
females. Age contributes positively to the
means-to a change in self-esteem than to
wage rate, and married persons earn signifi-
comparable alterations in human capital. For cantly lower wages for workers in the 1980
the average person in the entire data set, a
data set. Marriage may act as a constraint, or
10% increase in self-esteem improves the real
married people may be choosing more flexible
wage by 4.8% using 1980 data and 13.3%
jobs that pay less. Having young dependents,
using 1987 data.12 In 1980, a 10% expansion another potential labor market constraint, is
of education, work tenure, or basic skills
associated negatively with the real wage level
(AFQT), ceteris paribus, enlarges wages by but the relation is statistically insignificant.
1.1%, .4%, and 1.2% respectively. Additional
Greater financial wealth contributes posi-
work experience has a similar, but slightly
tively to the real wage level of employees in
smaller, impact on wages than self-esteem.
the 1987 data set but is independent of the real
The real wage grows by 4.3% when work ex-
wage level for workers in 1980. The sample-
perience expands by 10%. In 1987 wages
selection correction is positive and significant
were more sensitive to a change in education in each estimated model, implying a positive
than other forms of human capital. The impact
correlation between unobservables in the
on a person’s wage rate of an increase in ed-
labor force participation equation and the
ucation is essentially one-fourth as large as
wage equation.
would occur for a comparable improvement
Variables describing a person’s family
in self-esteem.
background characteristics as a youth, used to
An F-test for the hypothesis that the wage
rate is independent of both SMSA and Unem-
ployment rejects the hypothesis at the .01 13. Rodgers and Spriggs [ 19961 argue that AFQTmea-
level for both the 1980 and 1987 data sets. sures basic skills with substantial error, particularly for
blacks. They suggest caution in drawing inferences or mak-
ing policy statements based on the estimated relationship
between AFQT and real wages. For an excellent discussion
12. What can account for the greater magnitude of the of issues in interpreting the correlation between AFQTand
effect of improvements in self-esteem upon wages for wages see Cume and Thomas [1995]. In their work, Currie
workers in 1987 relative to those employed in 1980? It is and Thomas separate AFQT into its component parts and
possible that the factors contributing to self-esteem are find that each element of AFQT affects subsequent wages
more closely linked to productivity as individuals move differently. For certain components they note that blacks
through their working life cycle. experience a higher monetary return than whites.
GOLDSMITH, VEUM, & DARITY: PSYCHOLOGICAL CAPITAL & WAGES 825
TABLE I11
Structural OLS Log Wage Estimates
(t-stati stics in parent he ses)
Variable Name Expected Sign 1980 Data 1987 Data
Self-Esteem Hat + .13 .2 5
(2.97)*** (3.73)***
Education + .12e-0 1 .27e-0 1
(1.67)** (6.75)***
Tenure + .69e-03 .54e-03
(3.1 I)*** (12.07)***
Experience + .76e-02 Sle-03
(5.29)*** (3.92)* **
AFQT + .19e-02 .12e-02
(2.34)*** (1.58)*
Male + .19 .17
(8.21)*** (1 1.84)***
Black - -.53e-01 -.30e-01
(1.98)** (1.73)**
Age + .20e-0 1 .60e-0 1
(2.92)*** (1.23)
Married - -.56e-01 -. 18e-01
(2.44)*** (1.25)
Kids - -.25 -.12
(34) (39)
Wealth + .63e-06 S4e-06
(.94) (1.56)*
Professional Parent + -.40e-01 .41e-01
(1.62)** (2.75)***
Both Parents + .27e-01 -. 20e-0 I
(1.42)* (1.72)**
Parent Education + .30e-02 .4 le-02
(34) (1.90)**
Religion + -.43e-01 .37e-02
(1.76)** (.IS)
SMSA + .79e-0 1 .86e-01
(3.80)*** (6.32)***
Unemployment - -.23e-02 -.18e-01
(37) (8.45)***
Selection + .59 .90e-01
(4.47)*** (1.30)*
Intercept + -.66 -.31
(2.41)** (.91)
Number of Observations 1411 6911
F 18.90*** 115.84***
(34,1376) (34, 6876)
R= .32 .36
%(A Wage)
.48 1.33
%(A SelfEsteem Hat)
%(A Wage)
11 .34
%(A Education)
%(A Wage)
.04 .07
%(A Tenure)
%(A Wage)
.43 .14
%(A Experience)
%(A Wage)
.12 .08
%(A AFQT)
TABLE IV
Structural Ordered Probit Estimates: Degree of Self-Esteem
(&statistics in parentheses)
Variable Name Expected Sign 1980 Data 1987 Data
Wage Hat + .63e-01
(57)
High Wage + .I 3 .32e-01
( 1 .SO)* (58)
Low Wage - -.IS -.72e-0 1
(1.58)* (1.41)*
Education + .3 7 .33e-01
(2. I,)** (3.74)***
Experience + .13e-02 .42e-03
(.73) (2.80)***
Tenure + -.28e-03 .33e-03
~41) (2.48)***
AFQT + .98e-02 .I Oe-0 1
(6.09)*** (10.81)***
Locus of Control + .I7 .93e-01
(7.39)*** (7.04)***
Male + .I3 54e-0 1
(1.76)** (l.SS)*
Black - .I6 .14
(2.57)*** (4.05)***
+ -. 1Se-02 -.41e-01
~09) (6.06)***
Married + .93e-01 .13
(1.67)** (4.04)’ * *
Kids I -.68e-0 1 .3Se-01
(1.13) (1.08)
Wealth + .16e-OS
(1.75)**
Professional Parent + .71e-01 -.97e-01
( I .OS) (2.53)***
Both Parents + -.38e-0 1 SOe-01
(.76) (1.75)**
Parent Education + .74e-02 .60e-02
(.go) (1.12)
Religion t .97e-0 1 -.76e-0 1
(1.58)* ( I .25)
Number of Observations 222s 8132
Log of Likelihood Function -3468 -8710
Chi Square (Degrees of Freedom) 3 17*** 851***
(18) (18)
~ ~ ~ ~~
account for individual-specific heterogeneity wage level. One possible explanation is that
not captured by a person’s self-esteem level, youths raised in such families are likely to
do play a role in the subsequent determination continue in school for advanced degrees and
of a person’s wage level. At the earliest stages not be in the labor force. Those working sim-
of the working life-cycle, those who were ply may possess other unaccounted for char-
raised in an “intact” family---one with both acteristics that make them less productive.
parents p r e s e n t 4 o m m a n d a significantly Interestingly, being affiliated with a reli-
higher real wage. However, having a profes- gious organization as a youth at age fourteen
sional parent results in significantly lower also exerts a negative impact on subsequent
GOLDSMITH, VEUM, & DARITY PSYCHOLOGICAL CAPITAL & WAGES 827
wages very early in a person’s working life. whose locus of control is more external. This
Later in the working life-cycle a person’s finding means that the structuraI wage equa-
wage is independent of having been raised in tion is identified empirically as well as theo-
a religiously affiliated family. However, per- retically. Moreover, because locus of control
sons raised in families with a professional par- is an important determinant of self-esteem
ent and with greater parent education earn sig- that contributes to a higher real wage, we find
nificantly more. A puzzling finding is that evidence that psychological capital has both
people from intact families earn significantly a direct effect-via self-esteem-and an indi-
less by 1987. rect effect-through locus of controlk-on a
The key finding is that various components person’s real wage level.
of skill-based human capital and a broad mea- Males hold a significantly more favorable
sure of psychological capital, self-esteem, sig- view of self-worth than females, ceteris pari-
nificantly affect real wages. Moreover, psy- bus. Although mean self-esteem is lower for
chological capital, relative to human capital, blacks than whites, when achievements, per-
has a greater impact on wages. Thus, an aspect sonal characteristics, and adolescent home en-
of personality that typically is part of unob- vironment are controlled for in the structural
served individual-specific heterogeneity is an self-esteem equation, being black is positively
important determinant of hourly compensa- and significantly related to self-perception.
tion. Marriage significantly enhances self-esteem,
while people with young dependents do not
Self-Esteem hold a significantly different level of self-es-
Achievements, including the completion of teem than comparable persons without the re-
more years of education, the accumulation of sponsibility of young dependents.
greater “basic skills” and more extensive People who grew up in an intact family had
work experience all exert a positive and sig- a significantly greater level of self-esteem in
nificant effect on self-esteem for workers in 1987. But those who had a professional parent
1987. Work experience with current and for- report a lower level of self-esteem in 1987.
mer employers fails to influence a person’s Using the 1980 data of the variables reflecting
self-esteem for the very young workers who a person’s adolescent family environment,
comprise the 1980 data set, but their accumu- only religious affiliation-which contributed
lation of education and “basic skills” contrib- positively-was related to subsequent self-es-
ute positively to their perception of self. In- teem.
terestingly, although these same components The key findings are that relative, but not
of human capital are significantly related to absolute, hourly wages are an important de-
the wage level, self-esteem is independent of terminant of self-esteem. Investments in
improvements in a person’s real wage, so long human capital also contribute to a more favor-
as their position in the societal wage distribu- able view of self. In addition, individuals
tion is held constant. whose upbringing and experiences lead them
However, people who receive a relatively to hold a more internal outlook on life have
“low” real wage report possessing a signifi- greater self-esteem. Recall that individuals
cantly lower level of self-esteem than workers higher in self-esteem, ceteris paribus, earn
in the middle of the wage distribution. Com- significantly more. Thus, human capital con-
manding a “high” relative wage is associated tributes both directly to a person’s wage level
with a more favorable view of self, and this and indirectly through its influence on self-es-
perception is measured with precision using teem-a channel heretofore unexplored.
the 1980 data set. These findings suggest that
wages do significantly influence a person’s VI. CONCLUSION
self-esteem. However, it is not necessarily This paper offers evidence that psycholog-
how much that is earned, but where earnings ical capital, as well as conventionally mea-
place an individual in the wage distribution sured human capital, are important determi-
that affects a person’s self-esteem. nants of the real wage. We find that self-es-
Individuals who are more internal in their teem, a broad measure of psychological capi-
outlook possess a significantly higher level of tal, contributes significantly to a person’s real
self-esteem than comparable individuals wage level. By controlling directly for indi-
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