Return to Experience and Initial Wage Level: Do Low Wage Workers Catch Up?

This paper estimates the relationship between initial wage and return to experience. We use a Mincer-like wage model to nonparametrically estimate this relationship allowing for an unobservable individual permanent effect in wages and unobservable individual return to experience. The relationship between return to experience and unobservable individual ability is negative when conditioning on educational attainment while the relationship between return to experience and educational attainment is positive. We link our finding to two main theories of wage growth, namely search and human capital. We are able to test if search frictions are the main driver of the negative relationship, but we find this is not the case.