The Life Cycle of Earnings and Educational Attainment of U.S. Cohorts

We document that age profiles of labor earnings for college- and high-school-educated workers are flatter for recent cohorts than for older cohorts. Workers who were 20-year old in 1940 saw their annual earnings increase four-fold over the course of their working lives. For workers who were 20-year old in 1970 the increase was 2-fold. We propose a parsimonious model of schooling and human capital accumulation on the job to account for this phenomenon. In our model a workers' ability is key for the accumulation of human capital in school and on the job. Workers with higher ability are more likely to attend college, and have steeper earning profiles. In this model the flattening results from the changing composition of workers: when the fraction of college-educated workers increases for a particular generation, the average ability of both college- and high-school-educated workers decreases. Thus, average earnings profiles flatten. We calibrate the model to fit some moments characterizing the earnings of the 1940 generation at different age. There is only one exogenous variable: the rental rate of human capital that increases through time. Our model accounts for 40% of the observed flattening of high-school earnings, and 73% for college earnings.