The contributions of search and human capital to earnings growth over the life cycle

- Develops a finite horizon life cycle model of earnings growth with endogenous human capital investment and search effort.
- Shows how interactions between human capital investment and search effort can impact earnings growth.
- Estimates the model using the NLSY and SIPP to quantify the relative importance of each force.
- Finds human capital accumulation accounts for 50% of earnings growth, job search 20% and importantly interactions of the two account for 30%.

This paper presents and estimates a unified model where both human capital investment and job search are endogenized. This unification enables us to quantify the relative contributions of each mechanism to life cycle earnings growth, while investigating potential interactions between human capital investment and job search. Within the unified framework, the expectation of rising rental rates of human capital through job search gives workers more incentive to invest in human capital. In addition, unemployed workers reduce their reservation rental rates and increase their search effort to leave unemployment quickly to take advantage of human capital accumulation on the job. The results show both forces are important for earnings growth and the interactions are substantial: human capital accumulation accounts for 50% of total earnings growth, job search accounts for 20%, and the remaining 30% is due to the interactions of the two.