Essays on Human Capital, Inequality, and Labor Supply
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This dissertation is to investigate economic questions, especially questions about labor market, using methodology built upon modern economic theory and empirical study. The topics that I study in this dissertation include human capital, inequality, labor supply, and life-cycle wage growth. All models throughout the dissertation are variants of life-cycle human capital models that are based on the work by Ben-Porath. Ben-Porath human capital model is the canonical model in the labor market literature to explain life-cycle wage growth and human capital investment. The dissertation presents and analyzes the key properties of the benchmark Ben-Porath model. It can be shown that the benchmark model can replicate the hump-shaped life-cycle income profile reasonably well but it fails to account for the fact that income inequality increases over the lifecycle in real life. To address this issue, I propose two possible extensions to the benchmark model that can solve the problem. The first way is to introduce ability heterogeneity among individuals and the second one is to introduce shocks to the human capital accumulation process. The reason why these two extensions can address the failure of the benchmark model will be discussed in detail. Since Ben-Porath model is the backbone model throughout the dissertation, detailed exposition of the benchmark model as well as its variants will help to understand the dissertation. I build a life-cycle risky human capital model to study the sources of lifetime inequality faced by high school graduates. High school graduates face two career paths when they graduate: to enter college or to enter the labor market directly. Each path is featured by uncertainty (shocks) and the paper wants to investigate the relative importance of initial conditions and shocks in accounting for lifetime inequality. I find that differences in initial conditions as of a real-life age of 19 can only account for approximately 40 percent of the variation in realized lifetime earnings and lifetime utility. If we focus on the individuals who choose the college path, I find that the shocks in college periods play a more important role in determining the variation of inequality than do initial conditions and shocks in working periods. This fact indicates that the college investment is very risky. I investigate the importance of labor supply in explaining gender differences in life-cycle wage growth, i.e, what fraction of gender differences in life-cycle wage growth can be attributed to different labor supply patterns? To answer this question, I build a life-cycle model in which agents make decisions about consumption, saving, labor supply and human capital investment. I find that the different labor supply patterns between genders can explain about 66 percent of the gender differences in life-cycle wage growth. Labor supply affects wage growth through two effects: experience effect and expectation effect. I find that experience effect can explain about 38 percent of the wage growth differences between genders at age 55 while expectation effect can explain 22 percent. The results indicate that labor supply plays a more important role in explaining gender wage differences than the findings in the previous literature and lends support to the importance of expectation in affecting people’s human capital investment decisions.
Li, Xin (2019). Essays on Human Capital, Inequality, and Labor Supply. Doctoral dissertation, Texas A & M University. Available electronically from