Returns to Education: New Challenges for Models of Human Capital Investment – RECHC

In most advanced societies, improving skill supply to the labor market is on the policy agenda. This is justified both by the fact that skill accumulation fosters innovation, and by the fact that the adoption of new technologies modifies the set of skills needed in the labor market. One powerful way to affect skill supply is through education, as education is an essential input in the production of labor market productive skills. Understanding how individuals make their schooling decisions and how such decisions affect labor market outcomes (earnings, job mobility) is essential not only for the economist, but also for the policy maker who has to decide which policy gives the right incentives to invest in education.

The objective of this project is to improve the state-of-the art modeling strategies of educational and labor market decisions and adapt them to features that are particularly important in today’s context, in which different educational programs prepare for a diverse set of occupations and in which desired policies aim to improve the match between individual skills and interests. To this end, we will estimate dynamic structural human capital investment models in three different institutional contexts. This will allow us to learn about individual behavior and simulate policies that aim to improve the transitions within education, from education to the labor market, and between jobs.

A usual assumption made in standard human capital accumulation models is that individual unobserved characteristics (ability or preferences) are stable over time. This assumption does not capture well the possibility that preferences might evolve as the individual progresses into the educational system by acquiring more or less specialized skills. In a first project, we relax this assumption in the French context, where individuals specialize at different stages of their educational progression. Our model also introduces a way to deal with endogenous sample attrition, a feature widely encountered in longitudinal survey data and that can cause sample selection biases.

Another usual assumption is that individuals have perfect information about their own skills when they make their schooling decisions. In a second project, we relax this assumption and allow individuals to be overconfident about their (labor market) prospects in the South Korean context, characterized by a high college enrollment rate and a high unemployment rate among the educated.

In a third project, we extend the standard model by allowing for a large diversity of both educational options and job opportunities to study how the type of post-secondary education affects occupational choices and wages. This project is conducted in the German context, characterized by a large variety of post-secondary educational programs, including vocational-oriented programs tailored to specific occupations.