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Endogenous Skills and Labor Income Inequality

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  • Yang, Guanyi

Abstract

How much does inequality in life depend on conditions established at age 18? What role does post-18 higher education play? I use an education choice model with exogenous conditions from family wealth, established human capital at age 18 and shocks to human capital to examine these questions. Family wealth and established human capital at age 18 determine the post-18 education choices. Education builds up human capital and reduces future earnings volatility. Absent this transmission channel, previous studies dramatically underestimate the importance of initial family wealth in explaining lifetime earnings inequality. My model finds that family wealth at age 18 explains up to 15% of lifetime earnings inequalities, and human capital at age 18 explains 72%. Policy counterfacutals that encourage college education by providing financial aid reduce inequality and improve welfare.

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  • Yang, Guanyi, 2018. "Endogenous Skills and Labor Income Inequality," MPRA Paper 89638, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89638
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    More about this item

    Keywords

    Lifecycle inequality; college enrollment; human capital accumulation; idiosyncratic uncertainty; general equilibrium; heterogeneous agents; quantitative macroeconomics.;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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