Uncertainty and Learning in Human Capital and Labor Markets

Abstract

This dissertation considers two aspects of the role of information and uncertainty in decision making. I begin with a broad introduction which surveys recent trends in the literature on human capital development and the role of human capital in labor markets. In Chapter 2, I explore a particular issue related to imperfect information and human capital investment. I apply a framework of investment under uncertainty to parents' decision to invest their time in their children's human capital. I show that parents' risk preferences are an important determinant of the time that they spend with their children. I develop an illustrative model which shows that parents who are more tolerant of risk should invest more heavily in early childhood, and also proportionately more in early than in late childhood. I then use the Panel Study of Income Dynamics (PSID), which contains measures of risk preferences for parents as well as multiple measures of parental time with children over childhood, to show that parents' time use follows the predicted pattern. Moreover, parents' time use follows this pattern more clearly for categories of time use which are more related to human capital investment. Chapter 3 considers another aspect of information, this time in the context of the labor market. I follow Gibbons and Katz (1991), who use the Current Population Survey (CPS) Displaced Workers Supplement (DWS) to measure the "lemons effect" of being laid off by comparing the wage outcomes of workers who are laid off to those who are displaced by a plant closing. I present suggestive evidence that when workers find reemployment in jobs which require a similar mix of tasks, this lemons effect of a layoff is mitigated. This finding is inconsistent with simple generalizations of the lemons effect to jobs with multiple tasks. My work begins to reconcile research which focuses on task-based microfoundations of productivity with research on employer learning. I next show that the measurement of the lemons effect is potentially hampered by a measurement issue known as recall bias. The CPS DWS asks respondents about displacement over the previous three years. While workers displaced by plant closing report displacements with equal likelihood over the previous three years, those who were laid off appear to forget displacement at a substantial rate. The measured lemons effect is driven by workers reporting displacement three years ago, when this bias is potentially most important. This is consistent with laid off workers forgetting displacement when they found new jobs with relative ease.