Lifetime Earnings Research Paper

Eleanor Wiske Dillon University of Michigan

Dissertation Abstract

Three Essays on Career and Education Choices
Chapter 1: “Risk and Return Tradeoffs in Lifetime Earnings” (JMP) There is a tradeoff between risk and expected earnings across occupations. Virtually all occupations require workers to invest in specific skills that tie them to that occupation, but workers face uncertainty about how much they can earn over a lifetime of that type of work. Rational, risk-averse workers will require higher average compensation to enter riskier occupations. This paper estimates the parameters of a model of occupation, labor supply, and consumption choices over the lifecycle of college-educated, prime-age men, using data from the Current Population
The relationship between the expected value and variance of lifetime earnings shows that compensation for earnings risk is a key explanation of variation in expected lifetime earnings across careers. The measured slope of the risk-return tradeoff is consistent with compensation for earnings risk under reasonable assumptions about the degree of workers’ risk aversion. As a source of lifetime earnings risk, idiosyncratic, persistent shocks to earnings dwarf business-cycle frequency, occupation-wide shocks. Employment risk, particularly the possibility of changing occupations and losing the earnings effects of accumulated specific skills, is also an important determinant of lifetime earnings risk. Chapter 2: “The College Wage Premium and Trends in College Enrollment” Earnings for workers with a college degree rose dramatically between 1980 and 2000 and have remained high relative to workers with only a high school diploma. College enrollment rates followed a similar pattern over the same period. This paper studies whether high school graduates are incorporating changes in the college earnings premium into their decision to enroll in college. Proxies for students’ expectations of the additional lifetime earnings
college system students have the opportunity to choose among a wide variety of colleges. We expect that student choices and competitive admission policies should sort similar students into similar schools, but in practice individual colleges enroll students with a wide variety of demonstrated abilities. This paper uses data from the National Longitudinal Survey of Youth 1997 cohort to consider how college-bound students and their families choose among colleges, with a particular focus on students who end up seemingly mismatched with the college they attend. The paper looks separately at the determinants of over-qualification, when a student’s measured ability is high for the college they attend, and under-qualification, when a student’s measured ability is low relative to the college they attend. There is weak support for the hypothesis that students with less financial resources will be more likely to be over-qualified for their schools because they cannot afford, or believe they cannot afford, a higher quality college. There is stronger evidence that students without a well-matched school within their home state public university system are more likely to end up mismatched, highlighting the constraints imposed by in-state tuition policies. Contrary to our initial hypothesis, students with the most information resources about college, for example students