Why do we ignore the risk in schooling decisions? joop hartog universiteit van amsterdam (
[email protected]) luis diaz-serrano CREIP - universitat rovira et virgili (
[email protected]) Abstract While uncertainty abounds in almost any decision on investment in schooling, it is mostly ignored in research and virtually absent in labour economics text books. This paper documents the scope for risk, discusses the tough disentanglement of heterogeneity and risk, surveys the analytical models, laments the absence of a good workhorse model and points out the challenges worth tackling: document ex ante risk that investors face, develop a tractable and malleable analytical model and integrate the option of consumption smoothing in analytical and empirical work. Hedging labour market risk in the stock market can be safely ignored. First draft, November 29 2013 This paper builds on Joop Hartog and Luis Diaz-Serrano (2014), Details of claims and statements made in this paper can be found there. The authors would like to acknowledge the financial support of the Spanish Ministry of Education (grant number ECO2010-20829). 1 1. Introduction Schooling decisions are drenched in uncertainty like fish swimming in water, but textbook treatment of human capital theory does not reflect this. With the exception of Yoram Weiss’ chapter in the Handbook of Labor Economics, introductory and even advanced labour economics textbooks do not pay attention to the obvious uncertainty that surrounds investment in schooling. Abilities, tastes, requirements of the curriculum, graduation, employment, job content, financial rewards are all inherently uncertain when decisions on school careers have to be made. School admission boards have to select students without fully knowing talent and drive, policy preferences for general over vocational curricula are motivated by supposedly better insurance against the vaguaries of the labour market, but empirical evidence is barely available.