Age Earnings Profiles - Economics · Age‐Earnings Profiles ... Year ‐Round Male Workers, 2009...

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Age‐Earnings Profiles

The fanning out of earnings by education level as the cohort ages

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Money Earnings (Mean) for Full‐Time, Year‐Round Male Workers, 2009

Lifetime Sum of College vs High School Earnings through age 65

$1,416,000

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Money Earnings (Mean) forFull‐Time, Year‐Round Female Workers, 2009

Lif i S Lifetime Sum of College vs High School Earnings

$872,000

D hi ll fDoes this mean college pays for itself?

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Source: Blau, Ferber, Winkler, 2006. The Economics of Women, Men and Work, 5th edition

Factors affecting returns to college in the Human Capital Model

Ht = Earnings from High School Education in year tt

St = Earnings from College Education in year t

Ct = College Tuition in year t

r = Rate of time preference

T = Time Span

Need a mechanism to equalize utility of income earned at different times: Present Value

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Future Value: The value at a future date of dollar today

Present value review

Period 0 Period 1 Period 2

$1 $1*(1+r) {$1*(1+r)}*(1+r)

$1*(1+r)2

Rate of time preference : proportional increase in income p p prequired next period to compensate for the loss of $1 today

:personal interest rate

Compounding: sequential computation of future value

Future Value: The value at a future date of dollar today

P i d 0 P i d 1 P i d 2 P i d 3 P i d T


Period 0 Period 1 Period 2 Period 3 Period T

$1 $1*(1+r) $1*(1+r)2 $1*(1+r)3 $1(1+r)T

r = 0.10; T=40

$1 $1*(1.1) $1*(1.1)2 $1*(1.1)3 $1(1.1)40

$1 $1.10 $1.21 $1.33 $45.26

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Present Value: The current value of a stream of future income

d d


Period 0 Period 1

$1 $1*(1+r)

$1/(1+r) $1


P i d 0 P i d 1 P i d 2


Period 0 Period 1 Period 2$1 $1*(1+r) $1*(1+r)2

$1/(1+r)2 $1/(1+r) $1

r = 0.1$1/(1.1)2 $1/(1.1) $1$0.83 $0.91 $1

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P i d 0 P i d 1 P i d 2 P i d 3 P i d T


Period 0 Period 1 Period 2 Period 3 Period T

$1 $1*(1+r) $1*(1+r)2 $1*(1+r)3 $1(1+r)T

$1/(1+r)T $1

r = 0.10; T=40

$1/(1.1)40 $1

$0.022 $1


Stream of $1 every year for T periods, starting next period


y y p , g p

T

Σ1/(1+r)t = $1/(1+r) + $1/(1+r)2 + $1/(1+r)3 + + $1/(1+r)TΣt=1

1/(1+r) $1/(1+r) + $1/(1+r) + $1/(1+r) + … + $1/(1+r)

< T

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Stream of $1 every year for T periods, starting next period


y y p , g p

T

Σ1/(1+r)t = $1/(1+r) + $1/(1+r)2 + $1/(1+r)3 + + $1/(1+r)TΣt=1

1/(1+r) $1/(1+r) + $1/(1+r) + $1/(1+r) + … + $1/(1+r)

< T

If r = 0.1; T = 40; Present Value = $9.78

If r = 0.05; T=40; Present Value = $17.16


$2000 furnace saves $200/year


Good deal?

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$2000 furnace saves $200/year


Good deal?T

Σt=1

1/(1+r)t

If r = 0.1; T = 40; Present Value = $1956

Breakeven: NEVER

If r = 0.05; T=40; Present Value = $3432

Breakeven: 15 years


PVS = Present Value of College Salary

PVS = 5 6 7

5 6 7 ...(1 ) (1 ) (1 ) (1 )

TT

S S S Sr r r r

+ + + ++ + + +

PVC = Present Value of College Costs

PVC = 3 3 51 1 2 2 4 42 3 4 5 ...

(1 ) (1 ) (1 ) (1 ) (1 ) (1 )T

T

H C HH C H C H C Hr r r r r r

++ + ++ + + + + +

+ + + + + +

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( ) ( )( ) ( ) ( ) ( )H C S HH C H C H C S H

Ht => decreases incentive to invest

St => increases incentive to invest

Ct => decreases incentive to invest

NPV = 3 3 5 51 1 2 2 4 42 3 4 5

( ) ( )( ) ( ) ( ) ( )...(1 ) (1 ) (1 ) (1 ) (1 ) (1 )

T TT

H C S HH C H C H C S Hr r r r r r

+ −− + + + −− − − + + +

+ + + + + +

t

r => decreases incentive to invest

T => increases incentive to invest

How high do returns have to be for college to break even?

NPV = 3 3 5 51 1 2 2 4 42 3 4 5

( ) ( )( ) ( ) ( ) ( )...(1 ) (1 ) (1 ) (1 ) (1 ) (1 )

T TT

H C S HH C H C H C S Hr r r r r r

+ −− + + + −− − − + + +

+ + + + + +(1 ) (1 ) (1 ) (1 ) (1 ) (1 )r r r r r r+ + + + + += 0 at breakeven

C = $5,000/year

H = 20,000/year for 44 years

r = 0.10

C = $15,000/year

H = 20,000/year for 44 years

r = 0.10

PV C ll t $PV College cost = $79,250

Breakeven

S – H = $8,104 over 40 years

Total: $324,000

PV College cost = $110,950

Breakeven

S – H = $11,346 over 40 years

Total: $453,830

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Can the human capital model explain earnings profiles?

Male Profile Female Profile

Stylized Facts Regarding Age Earnings Profiles

1) All profiles flatten with ageMost rapid wage growth early in career

2) Earnings increase with education

3) Earnings gap between education groups widens with age

4) M l f l i4) Male female comparisons1) Female earnings lower than male earnings

2) Female wage profiles flatter than men

Note: These are synthetic cohorts—longitudinal data may differ especially for women

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The role of labor market attachment on the increase in women’s college

enrollment

Women’s relative enrollment in college began to accelerate with the 1950 birth cohort

(the 1970s college cohort)

Time allocation decisions of white college educated women by birth cohort

Claudia Goldin, Lawrence Katz, and Ilyana Kuziemko, “Homecoming of American Women”, Journal of Economic Perspectives, 2006, 20:133-156.

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Percentage of degrees earned by women , by year of issue and degree level


Around the decade of the 70s, we start seeing increases in Around the decade of the 70s, we start seeing increases in nontraditional educational choices for womennontraditional educational choices for women

Percentage of first professional degrees earned by women, by year


Around the decade of the 70s, we start seeing increases in Around the decade of the 70s, we start seeing increases in nontraditional professional choices for womennontraditional professional choices for women

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Between 1972 and 1992 high school classes,

•Male college completion rate rose from 30% to 35%

•Female college completion rate rose from 26% to 42%

Sample high school graduates in the 1972 NLS and the 1992 NELSthe 1992 NELS.

Reported in Claudia Goldin, Lawrence Katz, and Ilyana Kuziemko, “Homecoming of American Women”, Journal of Economic Perspectives, 2006, 20:133-156

College Enrollment and College Wage Premium

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College Enrollment and College Wage Premium

The role of cognitive ability

Women have Women have eliminated the gapeliminated the gap


eliminated the gap eliminated the gap in high school in high school math and sciencemath and science

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Source of the rising female college completion rate relative to men since 1972

The combined effect of the relative increase in women’s test scores and The combined effect of the relative increase in women’s test scores and participation in high school science and math classes along with slight participation in high school science and math classes along with slight decline in advantage in high school rank explains 37decline in advantage in high school rank explains 37--63% of women’s 63% of women’s increased college completionincreased college completion

The human capital model predicts that increases i l b k t tt h t illin labor market attachment will

• increase incentives to attend college,

• Increase incentives to attend professional school

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Astin Survey, “Do you disagree with the statement, “the activities of married women are best confined to the home and family?” Responses of first year college women

NLS Survey, “Do you expect to be in the paid labor force at age 35?” Longitudinal responses of white womenClaudia Goldin, Lawrence Katz, and Ilyana Kuziemko, “Homecoming of American Women”, Journal of Economic Perspectives, 2006, 20:133-156.


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