Returns to Education with Earnings Uncertainty and Employment Risk over the Life Cycle

Kai Liu (), Magne Mogstad () and Kjell Gunnar Salvanes ()
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Kai Liu: Faculty of Economics, University of Cambridge, Postal: University of Cambridge, Faculty of Economics, Sidgwick Avenue, Cambridge, CB3 9DD, United Kingdom, https://sites.google.com/site/richardkailiu/
Magne Mogstad: Dept. of Economics, University of Chicago, Postal: University of Chicago, Department of Economics, 1126, East 59th Street, Chicago, Illinois 60637, The United States of America,, https://sites.google.com/site/magnemogstad/
Kjell Gunnar Salvanes: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH, Department of Economics, Helleveien 30, N-5045 Bergen, Norway, https://sites.google.com/view/kjellsalvanes/home

No 14/2025, Discussion Paper Series in Economics from Norwegian School of Economics, Department of Economics

Abstract: We measure the returns to education in the presence of earnings uncertainty and employment risk over the life cycle. The context of our study is Norway, offering a credible instrument for schooling and population panel data with nearly career long earnings histories. We first characterize the causal relationship between schooling, earnings, and employment over the life cycle. This relationship allows us draw conclusions about how additional schooling affects the probability of having a job as well as the level and dispersion of earnings over the life cycle. To disentangle uncertainty from heterogeneity, we next model the underlying earnings process, targeting the estimated causal relationship between schooling, earnings, and employment over the life cycle. We then fit a life-cycle model with precautionary saving motive to the estimated earnings process and observed consumption profiles. The estimated model allows us to quantify how earnings uncertainty and employment risk affect the incentives to invest in education, and to examine the extent to which the progressive tax-transfer system distorts these incentives.

Keywords: Returns to education; life-cycle earnings; income uncertainty; employment risk; precautionary savings (search for similar items in EconPapers)
JEL-codes: D91 I26 J24 J31 (search for similar items in EconPapers)
Pages: 84 pages
Date: 2025-06-30
New Economics Papers: this item is included in nep-dge and nep-lma
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