A Formulation of the Earnings Function Using the Concept of Occupational Investment

Abstract

Standard models of income determination specify income to be a function of two variables that measure postschool investment-the years of labor market experience and the years of employer tenure. This investigation develops a better proxy for general human capital investments by hypothesizing that the intensity of investment varies by occupation and that a proportion of the occupational skills are transferable with occupational change. After developing exogenous measures of these features, the occupational investment variable is calculated for the young men of the National Longitudinal Survey. Empirical work demonstrates that occupational investment is a strong determinant of income-far superior to the experience variable.

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