Human capital accumulation of salaried and self-employed workers

Both human capital accumulation and Lazear contracts can explain the raising wage of salary/wage worker through job experience or tenure. To distinguish between these two effects, Lazear and Moore (1984) used self-employed workers’ wage growth to partial out the effect of human capital accumulation from salary/wage workers’ wage growth. When the human capital accumulation behavior is identical across two kinds of jobs, the difference in wage growth between salary/wage workers and self-employed workers are due to Lazear contract since self-employed workers’ wage are determined by their productivity. However, in the model developed in this paper, when self-employed workers face more wage variation but enjoy a higher return for human capital, human capital accumulation for those two kinds of jobs are shown to be different. The model predicts that workers with higher human capital select to be self-employed. Under general assumptions on human capital production technology, workers with high human capital have flatter wage-experience profile as a result of optimal human capital accumulation. Thus the heterogeneity of salary/wage and self-employed workers that induces a different pattern of human capital accumulation can explain the observed lower wage growth of self-employed workers inLazear and Moore (1984).