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Separating uncertainty from heterogeneity in life cycle earnings

  • Flavio Cunha
  • James Heckman
  • Salvador Navarro

This paper develops and applies a method for decomposing cross section variability of earnings into components that are forecastable at the time students decide to go to college (heterogeneity) and components that are unforecastable. About 60% of variability in returns to schooling is forecastable. This has important implications for using measured variability to price risk and predict college attendance. Copyright 2005, Oxford University Press.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 57 (2005)
Issue (Month): 2 (April)
Pages: 191-261

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Handle: RePEc:oup:oxecpp:v:57:y:2005:i:2:p:191-261
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  1. James J. Heckman & Salvador Navarro-Lozano, 2003. "Using Matching, Instrumental Variables and Control Functions to Estimate Economic Choice Models," NBER Working Papers 9497, National Bureau of Economic Research, Inc.
  2. Richard Blundell & Ian Preston, 1998. "Consumption Inequality and Income Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 603-640.
  3. Pedro Carneiro & James J. Heckman & Edward J. Vytlacil, 2010. "Estimating Marginal Returns to Education," NBER Working Papers 16474, National Bureau of Economic Research, Inc.
  4. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions and Rates of Return," NBER Working Papers 13780, National Bureau of Economic Research, Inc.
  5. James J. Heckman, 2001. "Micro Data, Heterogeneity, and the Evaluation of Public Policy: Nobel Lecture," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 673-748, August.
  6. Luigi Pistaferri, 1998. "Superior Information, Income Shocks and the Permanent Income Hypothesis," CSEF Working Papers 07, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  7. repec:oup:restud:v:54:y:1987:i:2:p:243-55 is not listed on IDEAS
  8. Carneiro, Pedro & Hansen, Karsten & Heckman, James, 2003. "Estimating distributions of treatment effects with an application to the returns to schooling and measurement of the effects of uncertainty on college choice," Working Paper Series 2003:9, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  9. James J. Heckman & Edward Vytlacil, 2005. "Structural Equations, Treatment Effects and Econometric Policy Evaluation," NBER Working Papers 11259, National Bureau of Economic Research, Inc.
  10. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, vol. 46(5), pages 985-1012, September.
  11. repec:oup:qjecon:v:109:y:1994:i:3:p:659-84 is not listed on IDEAS
  12. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2002. "Removing the Veil of Ignorance in Assessing the Distributional Impacts of Social Policies," NBER Working Papers 8840, National Bureau of Economic Research, Inc.
  13. Hartog, Joop & Vijverberg, Wim P., 2002. "Do Wages Really Compensate for Risk Aversion and Skewness Affection?," IZA Discussion Papers 426, Institute for the Study of Labor (IZA).
  14. James J. Heckman & Edward J. Vytlacil, 2000. "Local Instrumental Variables," NBER Technical Working Papers 0252, National Bureau of Economic Research, Inc.
  15. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
  16. Heckman, James J & Honore, Bo E, 1990. "The Empirical Content of the Roy Model," Econometrica, Econometric Society, vol. 58(5), pages 1121-49, September.
  17. Cosslett, Stephen R, 1983. "Distribution-Free Maximum Likelihood Estimator of the Binary Choice Model," Econometrica, Econometric Society, vol. 51(3), pages 765-82, May.
  18. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, vol. 98(5), pages 1887-1921, December.
  19. Martin Browning & Lars Peter Hansen & James J. Heckman, 1999. "Micro Data and General Equilibrium Models," Discussion Papers 99-10, University of Copenhagen. Department of Economics.
  20. Heckman, James J, 1990. "Varieties of Selection Bias," American Economic Review, American Economic Association, vol. 80(2), pages 313-18, May.
  21. David Card, 2000. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," NBER Working Papers 7769, National Bureau of Economic Research, Inc.
  22. repec:oup:qjecon:v:113:y:1998:i:2:p:603-640 is not listed on IDEAS
  23. Laitner, John, 1992. "Random earnings differences, lifetime liquidity constraints, and altruistic intergenerational transfers," Journal of Economic Theory, Elsevier, vol. 58(2), pages 135-170, December.
  24. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  25. repec:oup:restud:v:64:y:1997:i:4:p:487-535 is not listed on IDEAS
  26. Matzkin, Rosa L, 1992. "Nonparametric and Distribution-Free Estimation of the Binary Threshold Crossing and the Binary Choice Models," Econometrica, Econometric Society, vol. 60(2), pages 239-70, March.
  27. Azeem Shaikh & Edward Vytlacil, 2005. "Threshold Crossing Models and Bounds on Treatment Effects: A Nonparametric Analysis," NBER Technical Working Papers 0307, National Bureau of Economic Research, Inc.
  28. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  29. Victor Chernozhukov & Christian Hansen, 2005. "An IV Model of Quantile Treatment Effects," Econometrica, Econometric Society, vol. 73(1), pages 245-261, 01.
  30. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College," NBER Working Papers 9546, National Bureau of Economic Research, Inc.
  31. James J. Heckman & Jeffrey A. Smith, 1998. "Evaluating the Welfare State," NBER Working Papers 6542, National Bureau of Economic Research, Inc.
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