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Post schooling human capital investments and the life cycle variance of earnings

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  • Magnac, Thierry
  • Pistolesi, Nicolas
  • Roux, Sébastien

Abstract

We propose an original model of human capital investments after leaving school in which individuals di¤er in their initial human capital obtained at school, their rate of return, their costs of human capital investments and their terminal values of human capital at a fixed date in the future. We derive a tractable reduced form Mincerian model of log earnings profiles along the life cycle which is written as a linear factor model in which levels, growth and curvature of earnings profiles are individual-specific. Using panel data from a single cohort of French male wage earners observed over a long span of 30 years, a random effect model is estimated first by pseudo maximum likelihood methods. This step is followed by a simple second step fixed e¤ect method by which individual-specific structural parameters are estimated. This allows us to test restrictions, compute counterfactual profiles and evaluate how earnings inequality over the life-cycle is a¤ected by changes in structural parameters. Under some conditions, even small changes in life expectancy seem to imply large changes in earnings inequality.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 765.

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Date of creation: Jan 2013
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Handle: RePEc:ide:wpaper:26788

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