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The risk and return of human capital investments

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  • Koerselman, Kristian
  • Uusitalo, Roope

Abstract

Human capital investments increase lifetime income, but may involve substantial risk. In this paper we use a Finnish panel spanning 22years to nonparametrically 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.

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  • Koerselman, Kristian & Uusitalo, Roope, 2014. "The risk and return of human capital investments," Labour Economics, Elsevier, vol. 30(C), pages 154-163.
    • Handle: RePEc:eee:labeco:v:30:y:2014:i:c:p:154-163
    DOI: 10.1016/j.labeco.2014.04.011
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    2. Vaishali Zambre, 2018. "The Gender Gap in Wage Expectations: Do Young Women Trade off Higher Wages for Lower Wage Risk?," Discussion Papers of DIW Berlin 1742, DIW Berlin, German Institute for Economic Research.
    3. Hämäläinen, Ulla & Koerselman, Kristian & Uusitalo, Roope, 2017. "Graduation Incentives Through Conditional Student Loan Forgiveness," IZA Discussion Papers 11142, Institute of Labor Economics (IZA).
    4. Sangui Wang & Lijuan Zheng, 2024. "The Impacts of the Poverty Alleviation Relocation Program (PARP) on Households’ Education Investment: Evidence from a Quasi-Experiment in Rural China," Sustainability, MDPI, vol. 16(10), pages 1-23, May.
    5. Kristian Koerselman, 2020. "Why Finnish polytechnics reject top applicants," Education Economics, Taylor & Francis Journals, vol. 28(5), pages 491-507, September.
    6. K. Majamaa & A.-R. Lehtinen & K. Rantala, 2019. "Debt Judgments as a Reflection of Consumption-Related Debt Problems," Journal of Consumer Policy, Springer, vol. 42(2), pages 223-244, June.
    7. Ze Chen & Yuan Wang & Yanjun Guan & Michael Jie Guo & Rong Xu, 2023. "Long‐term effect of childhood pandemic experience on medical major choice: Evidence from the 2003 severe acute respiratory syndrome outbreak in China," Health Economics, John Wiley & Sons, Ltd., vol. 32(5), pages 1120-1147, May.
    8. Alice Chen & Anthony T. Lo Sasso & Michael R. Richards, 2018. "Supply‐side effects from public insurance expansions: Evidence from physician labor markets," Health Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 690-708, April.
    9. Shirantha Heenkenda & D.P.S Chandrakumara, 2015. "A Canonical Analysis on the Relationship between Financial Risk Tolerance and Household Education Investment in Sri Lanka," International Journal of Innovation and Economic Development, Inovatus Services Ltd., vol. 1(4), pages 7-23, October.
    10. Oksana Domkina, 2015. "Risks of investment in personnel development: evidence from Ukrainian IT companies," International Economics, University of Lodz, Faculty of Economics and Sociology, issue 10, pages 64-80, June.
    11. Laura Ansala & Ulla Hämäläinen & Matti Sarvimäki, 2016. "Slipping through the Cracks of a Welfare State: Children of Immigrants in Finland," RF Berlin - CReAM Discussion Paper Series 1606, Rockwool Foundation Berlin (RF Berlin) - Centre for Research and Analysis of Migration (CReAM).
    12. Sofia Oliveira, 2015. "Returns to Vocational Education in Portugal," Investigaciones de Economía de la Educación volume 10, in: Marta Rahona López & Jennifer Graves (ed.), Investigaciones de Economía de la Educación 10, edition 1, volume 10, chapter 37, pages 725-750, Asociación de Economía de la Educación.
    13. Kerr, Sari Pekkala & Pekkarinen, Tuomas & Sarvimäki, Matti & Uusitalo, Roope, 2020. "Post-secondary education and information on labor market prospects: A randomized field experiment," Labour Economics, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    Lifetime income; Risk; Education; Human capital; Investment;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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