Review

Author(s): Robert E. Hall

Review by: Robert E. Hall
Source: Journal of Political Economy, Vol. 83, No. 2 (Apr., 1975), pp. 444-446
Published by: University of Chicago Press
Stable URL: http://www.jstor.org/stable/1830936
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444 JOURNAL OF POLITICAL ECONOMY

have a remarkable clarity of style an ability to explain complicated processes

in simple terms. It is too bad that more innovative interpretationshad not marked
some of the earlier chapters. This would have given the work greater cohesiveness
and would have ameliorated the disjointed topicality of most of the macro-
economic discussion.
JEREMY J. SIEGEL
University
of Chicago

Schooling,Experience,and Earnings.By JACOB MINCER.

New York: National Bureau of Economic Research, 1974.

In this compact volume, Jacob Mincer provides a theory and extensive empirical
evidence about the process of the accumulation of human capital on the job.
The main features of the theory will be familiar to readers of Mincer's earlier
work, but the empirical evidence is new. The book is uncompromisingly scientific
rather than polemical it is a detailed presentation of findingswithin a particular
intellectual framework,not an argument for that frameworkagainst alternatives.
Most of the testing of the theory takes the form of checks for internal consistency
within the established framework. The book is aimed at the believer, not the
skeptic, though the skeptic is bound to be impressed by Mincer's careful study of
the data and the substantial accord of his findings with the predictions of the
theory.
Mincer's basic theoretical contribution is the working out of the implications
of investment on the job in skills and general experience. He views the employer
as a purchaser of labor services and a seller of training at the same time. The
observed wage is the return to the worker's services, including the return to his
earlier investmentsin training, less the value of his current purchases of training.
Comparisons of observed wages among workers gives a mistaken view of the
differencesin their true incomes by overlooking the values of investments that
are deducted from gross wages. Both the current flow and the past stock of these
investments are unobservable, however, so the theory at this stage amounts to
nothing more than a relabeling of unexplained differencesamong workers as
differencesin unobserved stocks and flows of human capital acquired on the job.
The power of Mincer's theory arises from his hypothesis that workers invest in
human capital so as to maximize the present value of lifetime earnings. The
optimal pattern of investmentstarts at a high level and declines over the lifetime.
The gross wage starts at a low level representing the return to raw labor and
formal education and rises throughout the lifetime as capital is accumulated on
the job. The observed net wage rises more rapidly because it is the difference
between the growing return to labor and the shrinking flow of investments. A
central feature of the theory is its prediction that the net wage will equal the
gross return to inexperienced labor after a certain period in the labor force and
that this "overtaking point" depends only on the discount rate. The wages of
workers at the overtaking point can be explained by observable variables alone,
principally formal education. The group of workers at the overtaking point
(around 8 years of experience) is uniquely important in Mincer's sample.
Mincer's theoretical exposition represents the polar extreme to the anecdotes
and institutional detail typical of most writing in labor economics. In his view,
the theory of training and wages is an application of the standard economic
theory of optimal choice subject to a budget constraint. In particular, he does

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BOOK REVIEWS 445
nothing to convince the reader that workers face an operational choice about
their purchases of training on the job. Critics who believe that institutional
rigidities render the economic theory of labor supply meaningless will argue
along the same lines that workers are forced to accept a predetermined amount
of training. The central argument of good economics in general and the theory
of human capital in particular that economic forces determine institutions and
not the other way around is taken wholly for granted in this book and limits its
readership unnecessarily, in my view. Even within the theory of human capital,
Mincer deals only briefly with Gary Becker's important distinction between
general and specific human capital. Workers cannot rely on capturing the return
to investment in skills uniquely applicable to a particular employer and so will
not follow Mincer's optimal path in acquiring them. Mincer is almost certainly
right that the returns to general human capital dominate the returns to specific
capital forthe typical worker, but the point deserves more discussion in the book.
Mincer's empirical work encounters problems in measuring wages that are
familiar to all workers in this area. The Bureau of the Census collects data on
annual earnings and annual weeks of work for the previous year (1959 in this
case) and hours of work in the previous week. Many investigatorshave measured
hourly wages as annual earnings divided by the product of annual weeks and
weekly hours, a procedure known to have some biases. Mincer instead uses
annual earnings itself as his dependent variable. In some cases he treats annual
earnings as if it were proportional to the wage (implicitly assuming that annual
hours of work do not vary systematically in the population), and in other cases
he includes annual weeks on the right-hand side. The second procedure seems
especially questionable, as his estimated elasticity of earnings with respect to
weeks is not 1.0 but about 1.2. The theory of labor supply suggests that weeks of
work is an endogenous variable, as Mincer concedes. This complicates the
empirical verificationof the major hypothesis of the paper that a large fraction of
the dispersion of wages in the population can be explained by the observed
determinants of wages. In the subset of the data for workers at the overtaking
point, only 31 percent of the variance in annual earnings is explained by the
observed determinant, years of education; but when weeks of work is added, the
fraction rises to 58 percent. It would be interestingto have the explained fraction
of the variance of a wage variable of some kind, perhaps even annual earnings
divided by annual weeks.
Schooling,Experience,and Earningsdeserves comparison with ChristopherJencks's
influentialrecent book, Inequality:A Reassessment of theEffectof Familyand Schooling
(New York: Basic, 1972). Jencks's writing is frankly polemical, arguing that
redistributing the determinants of income does almost nothing to redistribute
income itself. His evidence is mainly the low explanatory power of equations
relating income to its observed determinants. In his work, education alone
explains only 11 percent of the variance of income, and even when measures of
family background, test scores, and occupational status are added, the fraction
rises only to 22 percent. In sharp contrast, Mincer claims that ". schooling and
post-school investment accounted for close to two-thirds of the inequality of
earnings of adult, white, urban men in the United States in 1959" (p. 96). The
two studies use differentbodies of data but cover essentially the same population.
They can be reconciled roughly as follows: First, Jencks studies income, which
has more dispersion than earnings and is harder to explain. Second, Jencks uses
wide age categories and attributes little explanatory power to age or experience.
This is probably the single largest discrepancy Mincer reports that education
alone explains only 7 percent of the variation in earnings in his sample, against
31 percent when education and experience are both included. Even on Jencks's

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446 JOURNAL OF POLITICAL ECONOMY

own ground, Mincer demonstrates that more careful scientificwork weakens the
conclusion that the observed determinants of income have little influence on its
dispersion. Mincer then goes on to his figure of two-thirds by two less firmly
supported inferences.In the overtaking group, where earnings are uncontaminated
by investments in training or the return to past training, the residual variance
of the log of earnings is 33 percent. In an equation where the contribution to
earnings of investment and return was observed, the residual variance should be
about the same. The total variance of log earnings is 0.67, so the fraction of
variance explained by the hypothetical equation is just under one-half. Mincer
believes that better measures of education could raise this to 55 percent. Finally,
equations that take credit for the explanatory power of annual weeks of work
explain 69-78 percent of the variance, depending on certain assumptions. Mincer's
two-thirdsis a rough average of the three figures,55, 69, 78. At least from the
point of view of Jencks's proposition about the effectof redistributingthe deter-
minants of income, 55 percent seems the highest defensible claim. Weeks of work
are jointly determined with earnings and cannot reasonably be labeled as
determinants. Even so, 55 percent is far above 22 percent, and Mincer's evidence
could form the basis of a strong counterattack on Jencks's position by those who
believe that earnings depend closely on rational choices about investments in
education and training. Such a counterattack would be very much out of the
spirit of Mincer's book, however.
This book makes a substantial contribution to scientificknowledge about the
earnings of individuals and the distribution of earnings in the population. It
should open up fruitfulnew lines of research on the centrally important questions
of income distribution and human capital.
ROBERT E. HALL
MassachusettsInstituteof Technology

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