IDEAS home Printed from https://ideas.repec.org/p/hhs/nhheco/2025_014.html
   My bibliography  Save this paper

Returns to Education with Earnings Uncertainty and Employment Risk over the Life Cycle

Author

Listed:

Abstract

We measure the returns to education in the presence of earnings uncertainty and employment risk over the life cycle. The context of our study is Norway, offering a credible instrument for schooling and population panel data with nearly career long earnings histories. We first characterize the causal relationship between schooling, earnings, and employment over the life cycle. This relationship allows us draw conclusions about how additional schooling affects the probability of having a job as well as the level and dispersion of earnings over the life cycle. To disentangle uncertainty from heterogeneity, we next model the underlying earnings process, targeting the estimated causal relationship between schooling, earnings, and employment over the life cycle. We then fit a life-cycle model with precautionary saving motive to the estimated earnings process and observed consumption profiles. The estimated model allows us to quantify how earnings uncertainty and employment risk affect the incentives to invest in education, and to examine the extent to which the progressive tax-transfer system distorts these incentives.

Suggested Citation

  • Liu, Kai & Mogstad, Magne & Salvanes, Kjell Gunnar, 2025. "Returns to Education with Earnings Uncertainty and Employment Risk over the Life Cycle," Discussion Paper Series in Economics 14/2025, Norwegian School of Economics, Department of Economics.
  • Handle: RePEc:hhs:nhheco:2025_014
    as

    Download full text from publisher

    File URL: https://openaccess.nhh.no/nhh-xmlui/handle/11250/3207104
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Carneiro, Pedro & Hansen, Karsten T. & Heckman, James J., 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," IZA Discussion Papers 767, Institute of Labor Economics (IZA).
    3. Cunha, Flavio & Heckman, James J., 2007. "Identifying and Estimating the Distributions of Ex Post and Ex Ante Returns to Schooling," Labour Economics, Elsevier, vol. 14(6), pages 870-893, December.
    4. Marcos D. Chamon & Eswar S. Prasad, 2010. "Why Are Saving Rates of Urban Households in China Rising?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 93-130, January.
    5. Belzil, Christian, 2007. "The return to schooling in structural dynamic models: a survey," European Economic Review, Elsevier, vol. 51(5), pages 1059-1105, July.
    6. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "2001 Lawrence R. Klein Lecture Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 361-422, May.
    7. Stacey H. Chen, 2008. "Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 275-289, May.
    8. Fatih Guvenen, 2009. "An Empirical Investigation of Labor Income Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 58-79, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Johannes S. Kunz & Kevin E. Staub, 2016. "Subjective Completion Beliefs and the Demand for Post-Secondary Education," SOEPpapers on Multidisciplinary Panel Data Research 878, DIW Berlin, The German Socio-Economic Panel (SOEP).
    2. Binelli, Chiara & Menezes-Filho, Naercio, 2019. "Why Brazil fell behind in college education?," Economics of Education Review, Elsevier, vol. 72(C), pages 80-106.
    3. Kemptner, Daniel & Tolan, Songül, 2018. "The role of time preferences in educational decision making," Economics of Education Review, Elsevier, vol. 67(C), pages 25-39.
    4. Fossen, Frank M. & Glocker, Daniela, 2017. "Stated and revealed heterogeneous risk preferences in educational choice," European Economic Review, Elsevier, vol. 97(C), pages 1-25.
    5. Christian Belzil, 2008. "Testing the Specification of the Mincer Wage Equation," Annals of Economics and Statistics, GENES, issue 91-92, pages 427-451.
    6. Zamarro, Gema, 2010. "Accounting for heterogeneous returns in sequential schooling decisions," Journal of Econometrics, Elsevier, vol. 156(2), pages 260-276, June.
    7. Burgess, Simon, 2016. "Human Capital and Education: The State of the Art in the Economics of Education," IZA Discussion Papers 9885, Institute of Labor Economics (IZA).
    8. Magnac, Thierry & Pistolesi, Nicolas & Roux, Sébastien, 2013. "Post schooling human capital investments and the life cycle variance of earnings," TSE Working Papers 13-380, Toulouse School of Economics (TSE).
    9. Anderberg, Dan, 2009. "Optimal policy and the risk properties of human capital reconsidered," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1017-1026, October.
    10. Teodora Boneva & Christopher Rauh, 2017. "Socio-Economic Gaps in University Enrollment: The Role of Perceived Pecuniary and Non-Pecuniary Returns," Working Papers 2017-080, Human Capital and Economic Opportunity Working Group.
    11. Manudeep Bhuller & Magne Mogstad & Kjell G. Salvanes, 2017. "Life-Cycle Earnings, Education Premiums, and Internal Rates of Return," Journal of Labor Economics, University of Chicago Press, vol. 35(4), pages 993-1030.
    12. James J. Heckman, 2008. "The Principles Underlying Evaluation Estimators with an Application to Matching," Annals of Economics and Statistics, GENES, issue 91-92, pages 9-73.
    13. Rémi Piatek & Pia Pinger, 2016. "Maintaining (Locus of) Control? Data Combination for the Identification and Inference of Factor Structure Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(4), pages 734-755, June.
    14. John K. Dagsvik & TorbjØrn HÆgeland & Arvid Raknerud, 2011. "Estimating the returns to schooling: a likelihood approach based on normal mixtures," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(4), pages 613-640, June.
    15. Frank Fossen & Daniela Glocker, 2011. "Expected future earnings, taxation, and university enrollment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(6), pages 688-723, December.
    16. Gautier, Eric & Hoderlein, Stefan, 2011. "A triangular treatment effect model with random coefficients in the selection equation," TSE Working Papers 15-598, Toulouse School of Economics (TSE), revised 25 Aug 2015.
    17. D'Haultfoeuille, Xavier & Maurel, Arnaud, 2009. "Inference on a Generalized Roy Model, with an Application to Schooling Decisions in France," IZA Discussion Papers 4606, Institute of Labor Economics (IZA).
    18. Santiago Budría, 2011. "Are Educational Mismatches Responsible for the ‘Inequality Increasing Effect’ of Education?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 102(3), pages 409-437, July.
    19. Lochner, Lance & Park, Youngmin, 2024. "Earnings dynamics and intergenerational transmission of skill," Journal of Econometrics, Elsevier, vol. 243(1).
    20. Peter Arcidiacono & V. Joseph Hotz & Arnaud Maurel & Teresa Romano, 2014. "Recovering Ex Ante Returns and Preferences for Occupations using Subjective Expectations Data," NBER Working Papers 20626, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:nhheco:2025_014. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Synne Stormoen (email available below). General contact details of provider: https://edirc.repec.org/data/sonhhno.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.