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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.

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  • 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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    References listed on IDEAS

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    1. Flavio Cunha & James Heckman & Salvador Navarro, 2005. "Separating uncertainty from heterogeneity in life cycle earnings," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 191-261, April.
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    7. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, July.
    8. Fatih Guvenen, 2007. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," American Economic Review, American Economic Association, vol. 97(3), pages 687-712, June.
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    Cited by:

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    4. 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.

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