The Risk and Return of Human Capital Investments

25 Pages Posted: 4 Dec 2013

See all articles by Kristian Koerselman

Kristian Koerselman

Åbo Akademi University

Roope Uusitalo

Uppsala University - Department of Economics; IFAU - Institute for Labour Market Policy Evaluation; Government of the Republic of Finland - VATT Institute for Economic Research; IZA Institute of Labor Economics

Abstract

Investing in human capital increases lifetime income, but these investments may involve substantial risk. In this paper we use a Finnish panel spanning 22 years to predict the mean, the variance and the skew of the present value of lifetime income, and to calculate certainty equivalent lifetime income at different levels of education. We find that university education is associated with about a half a million euro increase in discounted lifetime disposable income compared to vocational high school. Accounting for risk does little to change this picture. By contrast, vocational high school is associated with only moderately higher lifetime income compared to compulsory education, and the entire difference is due to differential nonemployment.

Keywords: lifetime income, risk, education, human capital

JEL Classification: C33, I24, J31

Suggested Citation

Koerselman, Kristian and Uusitalo, Roope, The Risk and Return of Human Capital Investments. IZA Discussion Paper No. 7752, Available at SSRN: https://ssrn.com/abstract=2363239

Kristian Koerselman (Contact Author)

Åbo Akademi University

Roope Uusitalo

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden

IFAU - Institute for Labour Market Policy Evaluation

Box 513
751 20 Uppsala
Sweden

Government of the Republic of Finland - VATT Institute for Economic Research

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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