Micro- and Macroeconomic Implications of Heterogeneity in the Production of Human Capital

Solomon Polachek, Tirthatanmoy Das and Rewat Thamma-Apiroam

Journal of Political Economy, 2015, vol. 123, issue 6, 1410 - 1455

Abstract: We derive a tractable nonlinear earnings function that we estimate separately individual by individual using NLSY79 data. We obtain three ability measures, a rate of skill depreciation, a time discount rate, and a population-wide estimate of the human capital rental rate. We utilize these parameters to verify a number of heretofore untested theorems based on the life cycle model. We show how these human capital production function parameters relate to cognitive ability, personality traits, and family background. Finally, we show that accounting for individual-specific heterogeneity dramatically reduces estimates of population-wide persistence of permanent and transitory shocks by over 50 percent.

Date: 2015
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