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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.

Suggested Citation

  • Seik Kim, "undated". "Uncertainty in Human Capital Investment and Earnings Dynamics," Working Papers UWEC-2008-18-P, University of Washington, Department of Economics.
    • Handle: RePEc:udb:wpaper:uwec-2008-18-p
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    File URL: http://www.jstor.org/stable/10.1086/655756
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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.
    2. Alexander Henke & Lin-chi Hsu, 2018. "The Impacts of Education, Adverse Childhood Experience, and Nativity on Intimate Partner Violence," Journal of Family and Economic Issues, Springer, vol. 39(2), pages 310-322, June.
    3. Hoang, Dung Phuong & Chu, Lan Khanh & To, Trung Thanh, 2023. "How do economic policy uncertainty, geopolitical risk, and natural resources rents affect economic complexity? Evidence from advanced and emerging market economies," Resources Policy, Elsevier, vol. 85(PA).
    4. Joseph Altonji & Disa Hynsjo & Ivan Vidangos, 2023. "Individual Earnings and Family Income: Dynamics and Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 225-250, July.

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