The Specification of Work History In the Earnings Function
Eg “ earnings capacity at time t; defined as what the Individual’s earnings would be If he did not Invest In human capital.
■ the rate of return to human capital Investment. Ee ■ earnings capacity after completion of s years of schooling; If direct costs of school and student earnings are largely offsetting
к£ ■ the ratio of dollar investment costs, С£, to earnings capacity, E£: i.e. a “time-equivalent” measure of investment atj^ime t.
Note that in equation (1), the returns are sunned over T years of labor force experience.
The main prediction of models of life cycle distributions of human capital investment is that C£ will be declining over tine. Dollar investment costs decline over time for two reasons: given a fixed lifetime, the returns from later investments are smaller; and investments that take place later in the life cycle are costlier since the price of time is Increasing due to the accumulation of human capital investment. Since is increasing over time, the ratio k£ ■ ct^®t can *** expected to decline even if dollar investment costs are constant or rise at a smaller rate than Eg. Thus the assumption that kg will be declining over time is a more general implication of these models. A simple functional form is: online payday loans direct lender
where к is the initial level of the investment ratio and В is the rate of decline of human capital investment. For simplicity, assume a constant rate of return for all post-school investment. Rewriting equation (1) in continuous terms, substituting (2) and integrating yields the simplest form of the earnings function:
The specification of the earnings function given by (3) assumes a continuously declining investment profile. For some subgroups of the population for example, married women—such an assumption is clearly untenable. Less obviously, once specific training and job mobility are introduced in the analysis, the assumption of a continuously declining investment path must be modified since specific training and job mobility are likely to have additional implications concerning the optimal volume and allocation of investment activities over the life cycle.