This paper assesses the trade-off between acquiring specialized skills targeted for a particular occupation and acquiring a package of skills that diversifies risk across occupations. Individual-level data on college credits across subjects and labor-market dynamics reveal that diversification generates higher income growth for individuals who switch occupations whereas specialization benefits those who stick with one type of job. A human capital portfolio choice problem featuring skills, abilities, and uncertain labor outcomes replicates this general pattern and generate a sizable amount of inequality. Policy experiments illustrate that forced specialization generates lower average income growth and lower turnover, but also lower inequality.
JEL classification: J24, E24
Key words: Human capital, occupational choice, income inequality
The authors have presented preliminary versions of this work at the Atlanta Fed, the Midwest Macroeconomics Meetings, the University of Essex, the University of Hawaii at Manoa, the University of Konstanz, the University of Southern California, and the University of Toronto. They thank H. He, G. Kambourov, B. Kuruscu, G. Vandenbroucke, R. Wolthoff, and especially G. Violante for useful suggestions. This research uses restricted-access data from the National Center for Education Statistics, and the authors thank its staff for their help. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Pedro Silos, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8630, , or Eric Smith, Department of Economics, University of Essex, Wivenhoe Park, Colchester, Essex, United Kingdom CO4 3SQ, 44 1206 87 27 56, firstname.lastname@example.org.
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