Introduction

In chapter 2 earnings profiles were introduced. It was argued that these profiles were related to human capital stocks accumulated over the life cycle. Human capital stocks were determined by individuals rationally choosing the proportion of time devoted to investment at each age. A rationale based on the finite life constraint served as reason for greater specialisation in investment activity for the young compared to the old. This led to greater human capital accumulation at young ages and hence a concave earnings profile.

In this chapter we concentrate on the initial life-cycle phase. Here specialisation occurs so that individuals literally spend all their time devoted to human capital investment. Such specialisation is defined as schooling. The questions we ask are: How does one picture potential earnings during the schooling phase? Can the returns to schooling be analytically measured? Why do individuals differ in their amounts of school? And finally, what role does government policy play in influencing both the levels of schooling across the population and the returns to the educational process?

Human capital specialisation

It is useful to define ‘schooling’ as being the period in which 100% of one's time is devoted to earnings enhancement. Recall the human capital production function described in chapter 2 and illustrated in table 2.1.