Business Intelligence

Measurement Of Labor Quality Growth Caused By Unobservable Characteristics

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Executive Summary

The standard economy-wide indices of labor quality (or human capital) largely ignore the role of unobservable worker characteristics. In this paper, the authors develop a methodology for identifying the contributions of both observable and unobservable worker characteristics in the presence of the incidental parameter problem. Based on data for Switzerland over the period 1991-2006, they find that a large part of growth in labor quality is caused by shifts in the distribution of un-observable worker characteristics. The overall index differs little from the standard indices, but contributions to growth attributed to education and age are corrected downwards.

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