Human capital portfolios

This paper assesses the trade-off between acquiring specialized skills targeted for a particular occupation and acquiring a package of skills that diversifies risk across occupations. Individual-level data on college credits across subjects and labor market dynamics reveal that diversification generates higher income for individuals who switch occupations whereas specialization benefits those who stick with one type of job. A human capital portfolio choice problem featuring skills, abilities, and uncertain labor outcomes replicates this general pattern and generates a sizable amount of inequality. Policy experiments illustrate that mandatory specialization generates lower average income growth, lower turnover and marginally lower inequality.