Lifetime Hours Inequality and Occupational Choice

This paper explores the effect of hours worked on lifetime earnings inequality, a factor often overshadowed by the focus of the literature on wages. I argue that hours dispersion arises from individuals with heterogenous learning ability and leisure preferences selecting into occupations that reward hours worked with future wage growth at different rates. Using empirical evidence, I demonstrate strong correlations between occupational wage growth, cognitive test scores, and hours worked. Informed by this evidence, I develop and calibrate a life-cycle model of endogenous labor supply and occupational choice to disentangle the role of leisure preferences and learning ability in explaining hours worked and earnings dispersion. I find that cognitive ability is responsible for about one fourth of the variance in log hours at age 23, and leisure preferences are responsible for the remaining three fourths. Despite its seemingly small contribution to hours dispersion, cognitive ability accounts for three times as much of the variance of earnings at age 55 (31%) compared to leisure preferences (10%). Finally, I look into the normative implications of these findings, showing that when incorporating learning ability as a driver of hours dispersion, increases in tax progressivity are more effective at reducing inequality and less costly in terms of lifetime welfare.