Earnings over the Life Cycle: What Do Human Capital Models Explain?
It is argued that labor market success is perhaps the most important indicator of individual welfare. As such, this paper surveys recent developments in human capital theory to explain how earnings vary across the population. The paper begins with standard life cycle accumulation models which explain why earnings rise at a diminishing rate over one's life cycle. These models are then modified to incorporate (1) school quality to explain race differences in earnings, (2) intermittent labor force participation to explain gender wage differentials, (3) heterogeneous human capital to explain occupational choice, (4) matching to explain geographic and job mobility, and (5) search to explain workers' and firms' incomplete information. Finally, additional extensions are considered to incorporate effort enhancing contracts as a special case. Copyright 1995 by Scottish Economic Society.
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Volume (Year): 42 (1995)
Issue (Month): 3 (August)
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