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The non-linear estimates are shown to be consistently higher than those from the linearized model.
Wage differentials across college majors are huge and have been increasing. The type of college education becomes important for college students in terms of future earnings. Understanding the treatment effect of major choice in a certain occupation is difficult because of the sorting behavior and the effect of occupation choice. In order to accomplish this, I provide a dynamic model that combines major choice with occupation choice. The simulation results illustrate that science majors earn 30% more if they choose jobs related to science. However, this high premium does not exist in all jobs. The major choice itself does not guarantee a high return. Occupation choice matters a lot in obtaining a higher premium. The second chapter proposes a dynamic model of college course and occupation choices, where individuals make human capital investment under imperfect information about the future return. Using simulation results based on this model, I investigate the role played by uncertainty in student choices. I contribute to the recent task-based heterogeneous human capital literature by adding choices made before individuals enter the labor market. By combining college transcript data and occupational knowledge requirement information, I match human capital with occupational tasks to better evaluate the labor market performance of college graduates. For tractability purposes, both human capital and occupational tasks are aggregated into two dimensions: STEM and non-STEM. Estimation results indicate that college courses have different returns at work, with STEM courses inducing relatively higher wages. When uncertainty is eliminated, individuals specialize more in STEM or non-STEM based on their comparative advantages. The change of specialization in STEM courses is bigger compared to non-STEM courses. Overall benefits of human capital specialization are more pronounced in top ranking colleges. Old-age medical expenditure risks have been documented to impose significant impacts on elderly savings. However, little is known about the consumption effects of elderly medical expenditure risks. In this study, we examine the effect of medical expenditure risk on elderly household consumption decisions. We identify the causal effect by exploiting the exogenous reduction in prescription drug spending risk as a result of the introduction of Medicare Part D in the U.S. in 2006. Using the Health and Retirement Study (HRS) data during 2004 - 2010, we find that declining medical expenditure risks had little impact on total consumption, regardless of nondurable or durable consumption.
This dissertation has two self-contained chapters in labor economics. In the first chapter, I exploit variation in job arrival rates due to the recession in the early 1980s to understand the relative importance of three main channels — skill accumulation, search, and learning — to an individual's lifetime wage growth, and analyze how these channels interact. Specifically, I construct and estimate a model of on-the-job search, dynamic wage growth, and occupational choice using data from the NLSY79 and O*NET. In my model, workers are heterogeneous in initial cognitive and manual skills, while jobs differ by how intensively these skills are used. Over time, workers sort into occupations for which they are well suited by searching either on the job or off the job as they learn about their comparative advantages and accumulate skills. The estimated model shows that, first, all three channels are important in explaining life-cycle wage growth. Second, the interactions of the three components also play a significant role in life-cycle wage growth. Finally, I use my estimated model to understand the persistent wage losses of individuals who graduate during a recession. I find that skill accumulation, both alone and interacted with the other two channels, is the primary contributor to the long-term effect. Richer parents tend to have richer children, and richer individuals tend to be healthier, especially later in life. In the second chapter, we quantify how much of health and wealth outcomes can be explained by parental inputs made in childhood. To this end, we present a model in which parents invest in the health and human capital of their children, while also allowing for adults to invest in their own health and human capital once they are adult. We calibrate the model to available data on intergenerational health and earnings persistence as well as the cross-sectional distribution of health, wealth and earnings. The model allows us to quantify the intergenerational effect of parental investments on the child's human capital, health and wealth outcomes separately from the effects of the child's own investments as an adult. As a result, the calibrated model sheds light on how income redistribution policies may affect health outcomes, and conversely how health policies can affect income distribution, and importantly how the impact of both types of policies may spill over to subsequent generations.
This paper exposits the modern theory of equalizing differences, viewed as optimal assignments of workers to jobs. The basic ideas are first illustrated in a simple model with binary choices of work attributes. Multinominal choices are briefly considered after that. Empirical implications are stressed, with special emphasis on elements of selectivity and stratification by tastes and technology. Applications are sketched for certain aspects of the economics of discrimination, human capital, the value of safety and the theory of implicit contracts. Issues raised by assignment stratification according to worker traits and productivities are discussed, and the principle sorting model by comparative advantageis outlined. The implied valuation system on personal traits and its relationship to factor-analytic models, as well as selectivity issues in educational and occupational choice illustrate this aspect of the theory.
In this dissertation, I build macroeconomic models to answer questions of empirical relevance for the study of labor markets. The dissertation consists of an introductory overview and three research essays. The first essay is devoted to duration dependence in unemployment, namely the fact that recently unemployed workers have a signicantly better chance of finding a job than the long-term unemployed. I build a directed search model to quantify the importance of three common explanations for this fact: (i) unobserved worker differences, (ii) skill loss, and (iii) job-search effort decline. Two novel results emerge: first, the bulk of the effect of unobserved heterogeneity is concentrated in the first six months of the unemployment spell; the drop in job-finding rates observed at longer spells is mostly a result of skill loss and lower search effort. Second, skill loss has a vastly greater impact on job-finding than the decline in search effort. These results have two clear implications for labor market policy: (i) the impact of active labor market programs is expected to be larger for the long-term unemployed; (ii) job-training programs are expected to be more effective than job-search assistance policies at reducing long-term unemployment. In the second essay I study how information obtained by a worker while trying to find a job affects her job-search effort. Specically, I analyze how a worker, who is uncertain about her labor market traits and learns about them while looking for a job, allocates her search effort over the unemployment spell. The main result is that search effort is increasing over time when the worker is optimistic about her traits but decreasing when the worker is pessimistic about her traits. This result can explain discrepant empirical findings from previous literature on search effort. The final essay is devoted to job-search effort as an insurance channel. I build a model in which workers face substantial risk in the labor market but they have two means of self-insurance against this risk: increase their savings and their search effort. The main result is that when labor market risk becomes more severe workers increase both their savings and search effort but the increase in savings is twice as large as the increase in search effort. That is, workers make use of search effort as an insurance channel but much less than the savings channel.