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Uncertainty in Human Capital Investment and Earnings Dynamics

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  • Seik Kim

Abstract

This paper provides a human capital theory-based explanation for the presence of a permanent component in earnings levels as well as individual heterogeneity in earnings slopes. We incorporate uncertainty about the future rental rates of human capital into a life-cycle human capital investment model and obtain an earnings equation implied by the solution to the worker's optimal investment decision. While heterogeneous growth stems from individual heterogeneity in the ability of human capital production, permanent errors are induced by the response of optimal investments to transitory rental rate shocks. We empirically show that both components are present. (c) 2010 by The University of Chicago. All rights reserved.

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  • Seik Kim, 2010. "Uncertainty in Human Capital Investment and Earnings Dynamics," Journal of Human Capital, University of Chicago Press, vol. 4(1), pages 62-83.
  • Handle: RePEc:ucp:jhucap:v:4:y:2010:i:1:p:62-83
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    1. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters,in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
    2. Lillard, Lee A & Weiss, Yoram, 1979. "Components of Variation in Panel Earnings Data: American Scientists, 1960-70," Econometrica, Econometric Society, vol. 47(2), pages 437-454, March.
    3. Haley, William J, 1973. "Human Capital: The Choice Between Investment and Income," American Economic Review, American Economic Association, vol. 63(5), pages 929-944, December.
    4. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, January.
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    Cited by:

    1. Semih Tumen, 2015. "Skill Acquisition in the Informal Economy and Schooling Decisions: Evidence from Emerging Economies," LABOUR, CEIS, vol. 29(3), pages 270-290, September.

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