Human capital investments and the life cycle variance of earnings

Abstract

We propose a model of on-the-job human capital investments in which individuals differ in their initial human capital, their rate of return, their costs of human capital investments and their terminal values of human capital at retirement. We derive a tractable reduced form Mincerian model of log wage profiles along the life cycle which is written as a function of three individual specific factors. The model is estimated by pseudo maximum likelihood using panel data for a single cohort of French wage earners observed over a long span of 30 years. This structure allows us to compute counterfactual profiles in which returns and terminal values are modified and we show how wage inequality is affected by these changes over the life-cycle.

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