Career and Skill Formation: A Dynamic Occupational Choice Model with Multidimensional Skills

The goal of the paper is two-folds. First, I construct and estimate a dynamic structural occupational choice model at the three-digit classification level, in which different occupations involve different mix of tasks. Second, I conduct a counterfactual simulation using the estimated model, to quantify the effects of progressive income tax on post-schooling human capital investment and occupational choices. In the model, various skills are acquired through learning-by-doing, depending on the tasks of the experienced occupations. The key feature of the model is that, unlike occupation specific human capital, the acquired skills can be partly transferred to other occupations. Hence, some of low skill occupations can be viewed as “stepping stone” to better occupations. The structural parameters of the model are estimated using the occupational characteristics in the Dictionary of Occupational Titles and the work history in the National Longitudinal Survey of Youth 79. The results of a counterfactual simulation in the estimated model indicate that switching to a flat income tax encourages mobility to highpaying occupations and accelerates human capital accumulation. A drawback of the tax code change is an increased inequality between educational groups.