We derive a tractable nonlinear earnings function which we estimate separately individual-by-individual using the NLSY79 data. These estimates yield five important parameters for each individual: three ability measures (two representing the ability to learn and one the ability to earn), a rate of skill depreciation, and a time discount rate. In addition, we obtain a population wide estimate of the rental rate of human capital. To illustrate heterogeneity in the production of human capital, we plot the distribution of these parameters along with NLSY79 reported AFQT scores. By utilizing these parameters, we are able to verify a number of heretofore untested theorems relating to human capital investments. In addition, we are able to show how these human capital production function parameters relate to cognitive ability, personality traits, and family background. Further, accounting for this individual specific heterogeneity dramatically reduces estimates of population-wide persistence of permanent and transitory shocks. |
