Unequal we stand: Human Capital and Occupational Choice over the Life cycle

Abstract

There are large differences in the amount of wealth held by different households in the US within and between age groups. I rationalize these features by building an occupational choice model where individuals endogenously accumulate entrepreneurial human capital via learning-by-doing process. The need to overcome borrowing constraints to start up or to scale up a venture provides incentive for high saving rates for would-be entrepreneurs and entrepreneurial households as compared to paid workers, and during their business spell entrepreneurial households acquire a specific human capital which enhance their future productivity and reduce their turnover rate. Therefore, households end up very unequal with respect to wealth and income within age or between age cohorts. Young individuals experiment higher inequality given that they face stringent entry cost preventing them to become entrepreneurs. Business experience emerges as an important complementary driver for wealth and income dispersion among individuals.