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The Risk and Return of Human Capital Investments

  • Koerselman, Kristian

    ()

    (Abo Akademi University)

  • Uusitalo, Roope

    ()

    (HECER)

Investing in human capital increases lifetime income, but these investments may involve substantial risk. In this paper we use a Finnish panel spanning 22 years to predict the mean, the variance and the skew of the present value of lifetime income, and to calculate certainty equivalent lifetime income at different levels of education. We find that university education is associated with about a half a million euro increase in discounted lifetime disposable income compared to vocational high school. Accounting for risk does little to change this picture. By contrast, vocational high school is associated with only moderately higher lifetime income compared to compulsory education, and the entire difference is due to differential nonemployment.

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File URL: http://ftp.iza.org/dp7752.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7752.

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Length: 25 pages
Date of creation: Nov 2013
Date of revision:
Publication status: published in: Labour Economics, 2014, 30, 154-163
Handle: RePEc:iza:izadps:dp7752
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  1. Bjorklund, Anders, 1993. "A Comparison between Actual Distributions of Annual and Lifetime Income: Sweden 1951-89," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 39(4), pages 377-86, December.
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  3. Jeffrey Brown & Chichun Fang & Francisco Gomes, 2012. "Risk and Returns to Education," NBER Working Papers 18300, National Bureau of Economic Research, Inc.
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  10. Raj Chetty, 2003. "A New Method of Estimating Risk Aversion," NBER Working Papers 9988, National Bureau of Economic Research, Inc.
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  12. Allan G. King, 1974. "Occupational choice, risk aversion, and wealth," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 27(4), pages 586-596, July.
  13. 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.
  14. Garrett, Thomas A. & Sobel, Russell S., 1999. "Gamblers favor skewness, not risk: Further evidence from United States' lottery games," Economics Letters, Elsevier, vol. 63(1), pages 85-90, April.
  15. 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.
  16. Bhuller, Manudeep & Mogstad, Magne & Salvanes, Kjell G., 2011. "Life-Cycle Bias and the Returns to Schooling in Current and Lifetime Earnings," IZA Discussion Papers 5788, Institute for the Study of Labor (IZA).
  17. 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).
  18. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  19. Uusitalo, Roope, 2002. " Changes in the Finnish Wage Structure: Will Demand and Supply Do?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 69-85.
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