Human Capital and Earnings Distribution Dynamics

Earnings heterogeneity plays a crucial role in modern macroeconomics. We document that mean earnings and measures of earnings dispersion and skewness all increase in US data over most of the working life-cycle for a typical cohort as the cohort ages. We show that a human capital model can replicate these properties from the right distribution of initial human capital and learning ability, while producing the key properties of the cross-section distribution. We also show that learning ability differences are essential to produce the increase in earnings dispersion over the life cycle and that these differences account for the bulk of the variation in the present value of earnings across agents. These findings emphasize the need to further understand the role and origins of initial conditions in macro models.