The Technology of Skill Formation and the Heterogeneity of Returns to Education
We investigated the distribution of returns to
investments in cognitive and self-regulatory skills over the life cycle. In our
simulation model, the distribution of returns to education results from the
interaction of neurobiological and socioeconomic factors in age-dependent skill
formation. A novel feature of our extension of the technology of skill
formation (Cunha and Heckman 2007) is a life-span model that integrates skill
depreciation at older ages and calibrates it to German data. Our evidence
quantitatively analyses the role early childhood plays in the shaping of human
capital formation, inequality and economic growth.Our findings have implications for optimal human
capital investment strategies. If society wants to maximize the sum of human
capital, then scarce resources should be invested in students from an
advantageous environment or with above-average learning abilities. If the goal
of the society instead is maximising the relative returns to each individual
and if heterogeneity is a result of social background, then limited resources
for additional educational investments should rather be given to the most
disadvantaged. If heterogeneity stems from individual giftedness, then
investments should be directed to the most gifted individuals. After the age of
18, individual incentives to invest in their human capital rises with the
degree of wage inequality on the labour market. In an extension of our model we examined intra- and
intergenerational earnings inequality in the German education and federal pension
system, based on age-dependent skill formation and the demographic trends in
Germany until 2080. If policy aims at reducing life time earnings inequality
within a generation the efficient choices are preventative investments into
human capital until the age of 18 and remedial financial transfers at later
ages. Due to self-productivity in human capital formation preventative policies
are most effective the earlier they begin. In the intergenerational dimension
additional tax financed educational investments starting in 2008 for the
newborns will have beneficial effects for the cohorts born after 1975 through
higher pensions. They will already experience an increase in their lifetime
earnings, even though they finance the educational investments for the newborns.
This is the result of the childhood skill multiplier and the federal pension
system.
Duration: 01.04.2007 - 31.12.2008
Pfeiffer, Friedhelm and Karsten Reuß (2008), Age-Dependent Skill Formation and Returns to Education, Labour Economics 15 (4), 631-646.
Pfeiffer, Friedhelm and Karsten Reuß (2008), Intra- und intergenerationale Umverteilungseffekte in der bundesdeutschen Alterssicherung auf Basis humankapitaltheoretischer Überlegungen, Deutsche Rentenversicherung 63 (1), 60-84.
Pfeiffer, Friedhelm and Karsten Reuß (2008), Fähigkeiten und Mobilität – Ökonomische Konsequenzen für das Humankapital in Ostdeutschland, in: K. Friedrich und A. Schultz, Brain drain oder brain circulation? Konsequenzen und Perspektiven der Ost-West-Migration, forum ifl Bd. 8, 43-50.
Pfeiffer, Friedhelm and Karsten Reuß (2008), Ungleichheit und die differentiellen Erträge frühkindlicher Bildungsinvestitionen im Lebenszyklus , in: T. Apolte und A. Funcke , Frühkindliche Bildung und Betreuung - Reformen aus ökonomischer, pädagogischer und psychologischer Perspektive, Baden-Baden, 25-34.
Pfeiffer, Friedhelm and Karsten Reuß (2007), Age-Dependent Skill Formation and Returns to Education: Simulation Based Evidence, IZA Discussion Papers 2882. Download
Pfeiffer, Friedhelm and Karsten Reuß (2007), Age-dependent Skill Formation and Returns to Education, ZEW Discussion Paper No. 07-015, Mannheim. Download
