Wage Growth and Worker Observability

TR Number



Journal Title

Journal ISSN

Volume Title


Virginia Tech


When hiring new entrants into the labor market, firms make their decisions based on limited
information about worker ability. An estimation of ability must be gleaned from observable factors such as a worker's education level, GPA and interview performance. While some firms conduct further testing, it remains that an accurate evaluation of worker ability at the time of hiring is very difficult to achieve. Evidence suggests that much of a firm's evaluation of worker ability takes place after a worker has been hired. The purpose of this paper is to provide a thorough analysis of wage growth and a firm's ability to observe its workers' productivity.

I regress a Mincerian wage equation using data from the March 2009 Supplement of the Consumer Population Survey merged with additional industry data gathered from the Bureau of Labor Statistics. The coefficient of worker experience interacted with various measures of worker observability is used to provide an indication of the importance of worker observability in the growth of wages. I examine four potential measures of worker observability: firm size, occupation, industry, and worker-manager ratio. The results indicate a positive relationship between worker observability and wage growth when using firm size as a measure of observability.



Labor, Wage Growth