Formation of Heterogeneous Skills and Wage Growth

This paper examines how primitive skills associated with occupations are formed and rewarded in the labor market over the careers of young male high school graduates. The objective task complexity measurement from the Dictionary of Occupational Titles enables a more direct look into primitive skills of workers. Through characterizing a worker’s optimal occupational choice, I show that the task complexity of a worker’s occupation can be interpreted as a noisy signal of his unobserved skills. Using career histories from the NLSY79, the growth of cognitive and motor skills as well as structural parameters are estimated by the Kalman filter. The results indicate that both cognitive and motor skills raise wages by 10% during the first three years. However, motor skills contribute little to subsequent wage growth. In contrast, cognitive skill growth continues to drive wage growth and raises wages by 30% during the first 10 years.