Matching, human capital, and the covariance structure of earnings

This paper tests the theory of job matching and the theory of human capital by examining the covariance structure of residuals from a typical Mincer log earnings equation using methods of moments techniques. Job matching theory predicts that we should observe an eventual decrease in the contribution of the job-match component in the residual variance as workers acquire tenure on the job. This prediction is mildly supported by the data. On the other hand, human capital theory predicts a trade-off between job-specific intercept and slope parameters. This prediction, which is not shared by the theory of matching, is strongly supported by the data. This is especially true for men with at least a high school degree. (C) 2002 Elsevier Science B.V. All rights reserved.