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A large fraction of the variation in wage levels and wage growth rates among individuals remains unexplained. Economists argue that ?unobserved? heterogeneity is among the more likely reasons for this unexplained variation in wages. The source of individual heterogeneity is typically attributed to data limitations and the unobservability of certain productivity related factors. In this paper we present a theory of career choice and derive a discriminating test between two inherently unobservable sources of heterogeneity – learning ability and workers? inter-temporal preferences (discounting) – both of which can clearly account for the variation in wage levels and wage growth rates. We apply this test to the large observed differences in wages and wage growth rates between smokers and non-smokers. The empirical evidence suggests that smoking is a proxy for individual discount rates.

Turnover falls with tenure - this is one of the best established empirical regularities of labor economics - but finding a tenure effect on wages seems to be very hard. Within-job wage cuts do not seem very uncommon either. We reconcile these findings by revisiting an old question: how gains from firm specific training are split between workers and firms. The division is determined by a stationary distribution of outside offers. The model is ex post monopsony: the lower a wage a firm pays to a specifically trained worker, the more profit it makes and the more eager it is to have her stay, but the more likely she is to leave. The optimal time paths of wages and turnover probabilities show that even if marginal product is increasing, wages need not be increasing; but rising marginal product always implies a falling turnover rate.