Post schooling human capital investments and the life cycle variance of earnings

We propose an original model of human capital investments after leaving school in which\ud individuals di¤er in their initial human capital obtained at school, their rate of return, their\ud costs of human capital investments and their terminal values of human capital at a fixed\ud date in the future. We derive a tractable reduced form Mincerian model of log earnings\ud profiles along the life cycle which is written as a linear factor model in which levels, growth\ud and curvature of earnings profiles are individual-specific. Using panel data from a single\ud cohort of French male wage earners observed over a long span of 30 years, a random effect\ud model is estimated first by pseudo maximum likelihood methods. This step is followed by a\ud simple second step fixed e¤ect method by which individual-specific structural parameters\ud are estimated. This allows us to test restrictions, compute counterfactual profiles and\ud evaluate how earnings inequality over the life-cycle is a¤ected by changes in structural\ud parameters. Under some conditions, even small changes in life expectancy seem to imply\ud large changes in earnings inequality