Research on Dynamic Models of Earnings and Human Capital Accumulation in Partial and General Equilibrium settings

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A major goal of this. project is the construction of the aggregate supply of skills to the U.S. economy. This supply curve will be a tool for exploring the likely impacts of tax reforms, social security reforms, proposals for tuition subsidies, and other policies designed to promote the formation of skill in the economy. A broad array of policy proposals will be evaluated. Although the main focus is on tax policy and human capital accumulation, how taxes affect capital accumulation and hence wages; how employment subsidies affect skill formation and employment; and how subsidies to education and training affect physical capital formation and wage differentials will also be analyzed. Both short run and long run impacts of public policies will be considered in a dynamic general equilibrium framework. The following tasks will be undertaken: (A). To formulate and estimate microeconomic life-cycle models of earnings, labor supply, schooling and on the job training that can be used as inputs into rigorously justified policy simulations. A major focus of this portion of the project is to produce estimates of the human capital production function that is the principal input into endogenous growth models and models in public finance used to simulate the impacts of policies. (B) A comprehensive assessment of the current and past tax and subsidy treatment of human capital will be undertaken. (C) Aligning general equilibrium forecasts with micro estimates is a distinctive feature of this project. A general equilibrium framework is essential if the insights of modern dynamic public finance are to be applied to systematically investigate the effects of alternative policies. A major goal is to improve the empirical foundations of a class of general equilibrium simulation models. Current widely used calibration methods take micro parameters estimated from models that assume one economic environment and transport them without modification to very different economic settings. This practice raises the possibility of inconsistency in the estimates used to simulate a macro model. The simulation and micro estimation of the model will be integrated to ensure consistency of micro and macro estimates.