Measurement of labor quality growth caused by unobservable characteristics

Thomas Bolli and Mathias Zurlinden

Issue
2009-01

Pages
22

JEL classification
J24, J31

Keywords
human capital, labor quality

Year
2009

The standard economy-wide indices of labor quality (or human capital) largely ignore the role of unobservable worker characteristics. In this paper, we 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, we find that a large part of growth in labor quality is caused by shifts in the distribution of unobservable worker characteristics. The overall index differs little from the standard indices, but contributions to growth attributed to education and age are corrected downwards.