Scandinavian Working Papers in Economics

Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2005:6: Separating uncertainty from heterogeneity in life cycle earnings

Flavio Cunha , James Heckman and Salvador Navarro
Additional contact information
Flavio Cunha: University of Chicago, Postal: Department of Economics, 1126 E 59th Street, Chicago, IL 60637
James Heckman: University of Chicago, Postal: Department of Economics, 1126 E 59th Street, Chigago, IL 60637,
Salvador Navarro: University of Chicago, Postal: 1126 E 59th Street, Chicago, IL 60637

Abstract: This paper develops and applies a method for decomposing cross section variability of earnings into components that are forecastable at the time students decide to go to college (heterogeneity) and components that are unforecastable. About 60 % of variability in returns to schooling is forecastable. This has important implications for using measured variability to price risk and predict college attendance.

Keywords: earnings; unforecastable; forecastable

JEL-codes: C33; D84; I21

122 pages, December 10, 2004

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