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How Risky is Investment in Human Capital?

  • Joop Hartog
  • Hans van Ophem
  • Simona Maria Bajdechi

The risk of investment in schooling has largely been ignored. We assess the variance in the rate of return by surveying the international empirical literature from this fresh perspective and by simulating risky earnings profiles in alternative options, choosing parameters on basis of the very limited evidence. The distribution of rates of return appears positively skewed. Our best guess of ex ante risk in university education is a coefficient of variation of about 0.3, comparable to that in a randomly selected financial portfolio with some 30 stocks. Allowing for stochastic components in earnings also markedly affects expected returns.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2004/wp-cesifo-2004-08/cesifo1_wp1261.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1261.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1261
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  1. Orley Ashenfelter & Colm Harmon & Hessel Oosterbeek, 1999. "A Review of Estimates of the Schooling/Earnings Relationship, with Tests for Publication Bias," Working Papers 804, Princeton University, Department of Economics, Industrial Relations Section..
  2. Colm Harmon & Vincent Hogan & Ian Walker, 2001. "Dispersion in the Economic Return to Schooling," Working Papers 200116, School of Economics, University College Dublin.
  3. Brunello, Giorgio & Comi, Simona, 2000. "Education and Earnings Growth: Evidence from 11 European Countries," IZA Discussion Papers 140, Institute for the Study of Labor (IZA).
  4. David Card, 1994. "Earnings, Schooling, and Ability Revisited," Working Papers 710, Princeton University, Department of Economics, Industrial Relations Section..
  5. Trostel, Philip & Walker, Ian & Woolley, Paul, 2002. "Estimates of the economic return to schooling for 28 countries," Labour Economics, Elsevier, vol. 9(1), pages 1-16, February.
  6. Dooley, Martin D & Gottschalk, Peter, 1984. "Earnings Inequality among Males in the United States: Trends and the Effect of Labor Force Growth," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 59-89, February.
  7. 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).
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