Earnings within Education Groups and Overall Productivity Growth

Abstract

To offer a possible interpretation for recent empirical findings on earnings growth, this paper constructs a simple model with endogenous human capital investment, a distribution of natural abilities, and unbiased technological progress. The model predicts that in the long run, average earnings within any education group will grow more slowly than average wages overall. It also predicts that average earnings in high-education groups ultimately will rise relative to average earnings in low-education groups. In the model, these processes do not imply secular increases in the degree of inequality in the overall cross-sectional distribution of earnings.

JEL Classification: J24, J31