Specific Training and Inter-Industry Wage Differentials in U.S. Manufacturing

H UMAN capital theory posits that individuals invest in the acquisition of productive skills in order to derive higher future earnings. While the dichotomy between investments in and skills has long been recognised,t empirical tests of the theory do not usually distinguish between the two earnings components.2 In this paper the conventional earnings model is expanded to incorporate worker-financed specific training. The inclusion of tenure allows a segregation of estimates of returns to general and specific human capital. This disaggregation permits an examination of the relationship between worker-financing of specific training and interindustry wage differentials. Cross-section investigations typically report the importance of industry of employment as a wage determinant, even controlling for a myriad of individual characteristics.3 This result has been taken, perhaps prematurely, as evidence of pervasive labor market imperfections. If interindustry differences in skill specificity are important, we should expect systematic wage differentials. Increased acquisition of worker-financed specific training will be associated with lower initial wages and subsequent higher rates of wage increase. In section I we consider the implications of using alternative specifications of the earnings model. The distinction is drawn between general and specific human capital, allowing a relaxation of the assumption constraining the returns from these mix of skills to be equal across individuals. In the process of this exposition the specific training prediction of a negative relationship between industry standing wages and subsequent rates of wage growth is derived. This hypothesis is subjected to test using individual data from the 1971 National Longitudinal Survey of Young Men, and the results are reported in section II. The complication is raised that workers remain longer in jobs paying higher wages independently of specific training. A simultaneous equations model treating tenure and wage as endogenous variables is tested revealing little bias in the single equation specification. A concluding section summarizes the main findings and offers suggestions for future research in this area.