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Human Capital and Earnings Distribution Dynamics

Earnings heterogeneity plays a crucial role in modern macroeconomics. We document that mean earnings and measures of earnings dispersion and skewness all increase in US data over most of the working life-cycle for a typical cohort as the cohort ages. We show that a human capital model can replicate these properties from the right distribution of initial human capital and learning ability, while producing the key properties of the cross-section distribution. We also show that learning ability differences are essential to produce the increase in earnings dispersion over the life cycle and that these differences account for the bulk of the variation in the present value of earnings across agents. These findings emphasize the need to further understand the role and origins of initial conditions in macro models.

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~03-03-10.

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Date of creation: 10 Mar 2003
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Handle: RePEc:geo:guwopa:gueconwpa~03-03-10
Contact details of provider: Postal: Georgetown University Department of Economics Washington, DC 20057-1036
Phone: 202-687-6074
Fax: 202-687-6102
Web page: http://econ.georgetown.edu/
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Order Information: Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
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  12. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers 228, Carnegie Mellon University, Tepper School of Business.
  13. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2004. "The Cross-Sectional Implications of Rising Wage Inequality in the United States," CEPR Discussion Papers 4296, C.E.P.R. Discussion Papers.
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