Life Cycle Human Capital Formation, Search Intensity, and Wage Dynamics

This paper presents and estimates a unified model where both human capital investment and job search are endogenized. This unification not only enables me to quantify the relative contributions of each mechanism to life cycle wage dynamics, but also to investigate potential interactions between human capital investment and job search. Within the unified framework, the expectation of rising rental rates of human capital through searching in the future gives workers more incentive to invest in human capital. In the meantime, unemployed workers reduce their reservation rates to leave unemployment quickly to take advantage of human capital accumulation on the job. The results show that these interactions are well supported by data. Allowing for these interactions as well as heterogeneity in search technology, the unified model predicts that both human capital accumulation and job search contribute significantly to the wage growth over the life cycle with human capital accumulation accounting for 40 % of total wage growth and job search accounting for 50%. The remaining 10 % is due to the interactions of the two forces. Furthermore, job search dominates wage growth earlier in the life cycle while human capital accumulation dominates later in the life cycle. ∗This paper is one of the chapters in my Ph.D. thesis. I thank my committee members, Audra Bowlus, Hiroyuki Kasahara, and Lance Lochner for their continuous guidance and support. I would also like to thank Chris Robinson, Fabien Postel-Vinay, Todd Stinebrickner, Ben Lester as well as