# **1. Introduction**

The transition of adolescents from school to work critically determines the efficiency of subsequent human capital formation in economic activities. This paper examines wage dynamics and work experience of youth in a developing country with a focus on the role of schooling in determining their wage growth at the early stages of their labor market experience.<sup>3</sup> Complexity of job mobility has been a central problem in labor market research (e.g., Farber, 1999; Neal, 1999; Hall and Kasten, 1976). In his seminal work, Rosen (1972) emphasizes the importance of learning opportunities along with production activities, which characterizes the dynamic occupational choices of workers. There are largely two lines of theoretical discussion in this area. First, Bandit models assert that agents learn about their ability by working; adolescents choose (subjectively) riskier jobs to learn about their abilities (Johnson, 1978; Miller, 1984).<sup>4</sup> Thus, Bandit models predict large variations in wages in the early stages of workers’ careers. Second, the stepping-stone theory asserts that agents try an easy job first to accumulate experience that will be useful for their next steps, when they switch to more difficult jobs (Jovanovic and Nyarko, 1997).<sup>5</sup> Under this theory, wage variations are likely small at the early stage of labor market experience, but increase gradually.

Empirical studies of occupational mobility show that mobility is relatively greater in the early stage, but decreases over time (Farber, 1999; Neal, 1999; Hall and Kasten, 1976). If heterogeneous workers and firms are first matched and the quality of the match is revealed gradually through learning, we can explain relatively large mobility in the early stages of labor market participation and the stylized fact that wages increase with tenure (Jovanovic, 1978).<sup>67</sup> If specific human capital accumulates over time, it is also optimal for workers to stay at the current firm since returns to the investment are accrued later.<sup>8</sup> Thus the frequency of turnovers decreases with tenure. However, whether the youth choose risker (more difficult) or safer (easier) jobs at the beginning of their careers remains unanswered.

The crucial difference between the Bandit model and the stepping-stone model comes from what agents learn by choosing a job. In the Bandit model, workers learn about their abilities, while, in the steppingstone model, they learn skills specific to an occupation (which are however partially transferable to another occupation). What potentially allows us to distinguish between the above two theories as an

> 3 A large volume of studies examined returns to tenure, i.e., whether wage rises with tenure (seniority). For example, see Altonji and Shakotko (1987), Altonji and Williams (1997), Abraham and Farber (1987), and Topel (1991). Farber (1999) summarizes the literature.

> 4 Prendergast and Stole (1996) used a similar framework to show that youngsters who eager to learn react to signals aggressively. Using a similar setup, Yamauchi (2001) studied the dynamics of earnings inequality in societies that exhibit different degrees of ability (endowment) and noise (shock) variances.

> 5 They use an input-target Bayesian learning model. Theoretically, the intuition behind the decision regarding sticking to one activity or switch to the next is essentially shared with Parente (1994) and Jovanovic and Nyarko (1996).

> 6 Flinn (1986) structurally tested the implications and support joint determination of wages and turnover. 7 In the sociology literature, Wilk, et al., (1995) support that gravitation to jobs commensurate with ability; highly able workers converge to jobs that require high levels of cognitive ability.

8 Though many studies suggest positive returns to labor market experience, only a few studies explicitly used a measurement of training investments to estimate returns to training (that is, largely, specific human capital). For example, Yamauchi, Poapongsakorn and Srianant (2009) shows significantly positive returns to on-the-job training among plant workers in Thailand.

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