Essays on the Allocation of Talent, Skills and Inequality, and Life-cycle Effects of Health Risk

This dissertation consists of three essays. The first essay studies how health risk affects individuals' economic decisions due to changes in productivity, required medical expenditures, available time and survival probabilities implied by changes in health status. It assesses the role of these four channels in determining labour supply, asset accumulation and welfare using a life-cycle model calibrated to the U.S. economy. I find that all channels and the interactions between them have large implications for the macroeconomic variables studied. Health has larger effects for the non-college than college educated, explaining a significant fraction of the difference in labour supply, degree of reliance on government transfers and asset accumulation across education groups. Improving non-college health outcomes to approach those of college graduates results in large welfare gains, higher labour supply, and significantly lower reliance on government welfare programs. The second essay studies the evolution of wage inequality in the United States between 1980 and 2002 in a framework that accounts for changes in the employment of physical and cognitive skills and their returns. I find that within education-gender groups, average employed cognitive skills have remained constant, while average physical skills have declined. The returns to high levels of cognitive skills have increased dramatically, while returns to low levels of cognitive skills and physical skills have remained approximately constant. Skills account for approximately half of the increase in the college wage premium, and for a small but growing fraction of residual wage inequality. The final essay studies the sorting decisions of students with different levels of analytical and verbal skills into college fields of study. I build a model where each field tests and perfectly reveals to potential future employers only the students' skill that is intensively required in that field. Students' expected wages after graduation are a function of their revealed skill levels and firms' expectations of the unrevealed skills given the chosen field. I show how the size of each field and the average talent it attracts depend on the average skill levels, on skill dispersion and on the degree of correlation between skills in the student population.Ph