Mincer Equation, Power Law of Learning, and Efficient Education Policy
30 Pages Posted: 23 Mar 2013
The basis for the empirical research on earnings determination is the Mincer equation. Individuals are assumed to make schooling decisions by maximizing earnings. Leisure costs of schooling and labour supply are neglected which has some empirically implausible implications. This paper shows a way of deriving a Mincer-type earnings function from the more standard assumption of utility maximization. The implications are less questionable. The approach allows one to analyse the efficiency of education policy in Ramsey's tradition. Distortive wage taxation is shown to provide reason for subsidizing education in effective terms. Second-best policy is confronted with empirical evidence on OECD countries.
Keywords: Mincer equation, earnings determination, maximizing utility vs. earnings, power law of learning, second-best taxation in Ramsey's tradition, education elasticity rule
JEL Classification: J24, H21, I28
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