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What do the education premiums look like over the life cycle? What is the impact of schooling on lifetime earnings? How does the internal rate of return compare with opportunity cost of funds? To what extent do progressive taxes attenuate the incentives to invest in education? This paper exploits Norwegian population panel data with nearly career long earnings histories to answer these important questions. We provide a detailed picture of the causal relationship between schooling and earnings over the life cycle, following individuals over their working lifespan. To account for endogeneity of schooling, we apply three commonly used identification strategies. Our estimates show that additional schooling gives higher lifetime earnings and steeper age-earnings profile, in line with predictions from human capital theory. These estimates imply an internal rate of return of around 10 percent, after taking into account income taxes and earnings-related pension entitlements. Under standard conditions, this finding suggests it was financially profitable to take additional schooling because the rates of return were substantially higher than the market interest rates. By comparison, Mincer regressions understate substantially the rates of return. We explore the reasons for this downward bias, finding that it is driven by Mincer's assumptions of no earnings while in school and exogenous post-schooling employment.
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We investigate the pattern of educational assortative mating, its evolution over time, and its impact on household income inequality. To these ends, we use rich data from the U.S. and Norway over the period 1980-2007. We find evidence of positive assortative mating at all levels of education in both countries. However, the time trends vary by the level of education: Among college graduates, assortative mating has been declining over time, whereas low educated are increasingly sorting into internally homogenous marriages. When looking within the group of college educated, we find strong but declining assortative mating by academic major. These findings motivate and guide a decomposition analysis, where we quantify the contribution of various factors to the distribution of household income. We find that educational assortative mating accounts for a non-negligible part of the cross-sectional inequality in household income. However, changes in assortative mating over time barely move the time trends in household income inequality. This is because the decline in assortative mating among the highly educated is offset by an increase in assortative mating among the low educated. By comparison, increases in the returns to education over time generate a considerable rise in household income inequality, but these price effects are partly mitigated by increases in college attendance and completion rates among women.
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