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The Effect of Wages on Human Capital and its Virtuous Dynamic Cycle

Author

Listed:
  • Lartigue Mendoza, Jacques

    (Universidad Anáhuac México)

  • Domínguez, Salomón

    (Universidad Anáhuac México)

Abstract

This paper provides economic theory with a dynamic structural model that mathematically proves both a positive effect of wages on the workers’ human capital intertemporal investment decisions and the existence of a virtuous dynamic cycle between wages and human capital.Among the desired characteristics of the proposed model is that it has an analytical solution, permitting the achievement of an optimal decision rule for each choice variable and the calibration of its parameters using observed data; this favors an easy implementation by policymakers and researchers. The constructed statistics and the results of the empirical application of the model, to the Mexican developing economy, support the mathematical conclusions. The model predicts two benchmark human capital gross returns and their corresponding wages, by levels of education. Below the second one, human capital coming from formal education vanishes over time, due to investment not being enough to offset its depreciation; below the first one, workers stop investing in education. Unfortunately, around 40% and 20% of Mexican workers are located below them, respectively.

Suggested Citation

  • Lartigue Mendoza, Jacques & Domínguez, Salomón, 2023. "The Effect of Wages on Human Capital and its Virtuous Dynamic Cycle," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 15(1), pages 67-104, January.
    • Handle: RePEc:col:000443:020960
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    References listed on IDEAS

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    1. Daron Acemoglu & Jorn-Steffen Pischke, 1999. "The Structure of Wages and Investment in General Training," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 539-572, June.
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    More about this item

    Keywords

    Human capital; education; Wages; dynamic structural model; virtuous dynamic cycle;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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