Age, Experience, Earnings, and Investments in Human Capital

Abstract

This paper explores the distinction between physical age and experience within the context of the human capital model of earnings determination. We extend the human capital model to distinguish the investment behavior of age-experience cohorts and to incorporate the effects of calendar time. Several alternative models are developed which are empirically tested based on a unique body of data (on Swedish engineering graduates) reflecting the earnings of cohorts with identical educational qualifications cross-classified by age and experience for a 10-year period. The results clearly indicate the necessity for distinguishing between experience and age in analyses of investment in human capital and are consistent with the interpretation that younger members of the same experience cohort are more efficient in producing human capital. The analysis also indicates the sensitivity of investment profiles to a priori restrictions on functional form and detects an inflection point in earnings increases consistent with Becker's original formulation of human investment theory.