Essays on internal labor markets and education

Abstract

This dissertation covers two distinct but related topics in Labor Economics: promotion within firms and inequality in education. The first chapter develops a new model that explains why many firms do not favor their own employees for advancement. In equilibrium, some, but not all firms commit to promote internally. These "promotion" firms attract higher quality employees to entry-level jobs, which in turn makes the firm more likely to get skilled workers in upper level jobs. Non-promotion firms benefit by paying lower wages. This divergence in strategies reflects the scarcity of high-quality workers. The model generates several testable predictions regarding the differences in wages and the return to tenure between promotion and non-promotion firms. I confirm these predictions empirically using a matched employer-employee data set from the UK. Chapter two analyzes how the way we measure achievement affects estimates of the black-white test gap among young children. Although both economists and psychometricians typically treat test scores as interval scales, they are reported using ordinal scales. We use the Early Childhood Longitudinal Study and the Children of the National Longitudinal Survey to examine the effect of order-preserving scale transformations on the evolution of the black-white reading test score gap from kindergarten entry through third grade. Plausible transformations reverse the growth of the gap in the CNLSY and greatly reduce it in the ECLS-K during the early school years. All growth from entry through first grade and a nontrivial proportion from first to third grade probably reflects scaling decisions. To address the measurement problems demonstrated in chapter two, in chapter three we relate test scores to adult outcomes. Using data from the CNLSY, we perform order-preserving scale transformations on reading and math test scores to maximize their ability to predict completed education. We find that the black-white achievement gap grows during the early years of education when measured in terms of test scores' economic value. Classical measurement error is insufficient to explain the growth in the gap.