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Endogenous Skills and Labor Income Inequality

Guanyi Yang

MPRA Paper from University Library of Munich, Germany

Abstract: How much does inequality in life depend on conditions established at age 18? What role does post-18 higher education play? I use an education choice model with exogenous conditions from family wealth, established human capital at age 18 and shocks to human capital to examine these questions. Family wealth and established human capital at age 18 determine the post-18 education choices. Education builds up human capital and reduces future earnings volatility. Absent this transmission channel, previous studies dramatically underestimate the importance of initial family wealth in explaining lifetime earnings inequality. My model finds that family wealth at age 18 explains up to 15% of lifetime earnings inequalities, and human capital at age 18 explains 72%. Policy counterfacutals that encourage college education by providing financial aid reduce inequality and improve welfare.

Keywords: Lifecycle inequality; college enrollment; human capital accumulation; idiosyncratic uncertainty; general equilibrium; heterogeneous agents; quantitative macroeconomics. (search for similar items in EconPapers)
JEL-codes: C6 D31 D91 E03 E24 E64 J22 J24 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2018-01-24
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