Empirical studies of earnings over the life cycle in Great Britain

Abstract

Since its formalisation, the theory of human capital has become the dominant model for explaining earnings over the life cycle. This framework hypothesises that individuals devote a certain proportion of their time in each year to acquiring productivity enhancing skills, which increases their earnings capacity in the labour market. Career breaks are one reason for why female workers are observed to earn less than males since during the break, no new investment is undertaken and the stock of existing skills depreciates. If these career breaks are planned, however, women will choose to invest in less human capital in all periods prior to the break occurring. The first part of the thesis specifically tests the prediction that future spells of non participation lower the quantity of human capital that women invest in during their early years. A model is developed predicting that women anticipating future career breaks invest in less schooling and enter the labour market with lower starting salaries than similarly able men. This negative effect on investment increases with the length of the break and the earlier the date at which the break begins. Using data from the National Child Development Study (NCDS), it is found that even after allowing for the possible simultaneous determination of non participation and schooling, women who experience career breaks by the age of 33 are observed as having invested in less full time education. In addition, women who experience any kind of break by age 33 earn, on average, 10% less than men in their first job. Due to the reduced form nature of the equation estimated, however, the direct effect that schooling has on earnings is not identified. This is addressed in a second statistical analysis using the NCDS, which relates earnings at age 33 to years of schooling. Unlike the conventional Mincerian earnings equation, however, separate estimates of the return to schooling are obtained for each of the local education authorities (LEAs) in England and Wales. These LEA-specific returns are then regressed on a set of variables capturing school quality in order to test the hypothesis that individuals receiving higher quality education earn a higher rate of return to schooling. The results suggest that although there exists considerable variation in the value of education across LEAs, school quality exerts little impact on these estimated rates of return.

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