The Importance of Bundling in a Gorman-Lancaster Model of Earnings

The idea that the labor market of individuals can be decomposed into payments to separate productive attributes has an enduring appeal in economics. Assuming that demographic groups differ only in their endowments of productive characteristics it is possible to rationalize observed demographic earnings differentials without invoking the arguments that characteristics specific to a particular demographic group are direct objects of employer demand. By aggregating skills over all demographic groups it is possible to produce a theory of the market determination of the prices of skills held in different amounts by different demographic groups. This paper considers conditions under which characteristics are uniformly priced across sectors of a multisector economy. The paper presents empirical evidence that rejects uniform pricing of characteristics as a description of the US labor market. Bundling may account for this evudence but other hypotheses do as well. (authors)