Question

The standard Mincerian wage equation is as follows:

log(w)=β0+β1S+β2exp+β3exp^2+β4X+ϵ

Q: Why is work experience and its square included in the equation? How does it relate to standard human capital theory?

Answer 1

Work experience is directly related to worker's wage, w. Higher training increases worker's productivity and greater chance of getting higher wages.

Given equation captures the effect of increase in worker's wages with schooling, S and the work Experience, Exp.

Work experience is added in the equation as it directly affects the w.

The squared work experience is added just to check the concavity of log(wages) with respect to Exp. It tells us rate of change in wages changing experience. If the coefficient, beta3 is negative, then it implies that an increase in the Exp increases the wages but at a decreasing rate.

If beta3 is positive, then wages increase with rise in Exp at an increasing rate

How does it relate to standard human capital theory?

Human Capital is the knowledge and skills a person has that increases his productivity.

Return to the work experience is the return to the human capital. Higher work experience implies higher productivity and higher wages and hence higher human capital. So, the equation is related to human capital theory as it analyse that factors that affect the wages of the worker. Wages are strongly linked to human capital.