Investment in human capital is costly and specific to each individual, and it is
concentrated in the beginning of the life cycle. The marginal product of human
capital investment falls with the level of learning, and the buildup of human
capital is thus spread over several periods. Figure 2 shows that labor productivity
in the first period of the life cycle is normalized at unity, and it increases during
the first 10 years of the life cycle. The level of labor productivity is maintained
during the next 30 years and falls when the individual begins to retire from the
labor market. Human capital depreciates at a constant rate, and the wage rate
per unit of working time is falling during the last third of the life cycle.
Figure 2. Labor productivity over the life cycle
4 Results
We next introduce a draft system and analyze the economic effects of the reform.
Conscripts are constrained in the use of time in the first period of the life cycle,
and they may be paid less than what would be the value of their labor services
after the ordinary wage tax. This is formalized as a supplementary tax being
imposed on their net wage income in the first period, net wage income meaning
the after-tax value of their labor supply. Public spending on goods and services
is held constant, and the proportional tax rate on wage income is determined
endogenously to balance the public budget. To assess the long run impacts of
the policy reform, the simulated policy changes are compared with a baseline
simulation reflecting the initial steady state.
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