Human Capital: Education and Earnings. Wages will vary among workers because workers are different. We each bring into the labor market a unique set of abilities and acquired skills, or human capital . - PowerPoint PPT Presentation
Human Capital: Human Capital: Education Education and Earnings and Earnings Wages will vary among workers Wages will vary among workers because workers are different. because workers are different. We each bring into the labor We each bring into the labor market a unique set of abilities market a unique set of abilities and acquired skills, or and acquired skills, or human human capital capital . . We begin our study of human We begin our study of human capital by focusing on the capital by focusing on the decision to acquire formal decision to acquire formal education. The skills we education. The skills we acquire in school make up an acquire in school make up an
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Human Capital: EducationHuman Capital: Education and Earnings and Earnings
Wages will vary among workers because Wages will vary among workers because workers are different. We each bring into the workers are different. We each bring into the labor market a unique set of abilities and labor market a unique set of abilities and acquired skills, or acquired skills, or human capitalhuman capital..
We begin our study of human capital by We begin our study of human capital by focusing on the decision to acquire formal focusing on the decision to acquire formal education. The skills we acquire in school education. The skills we acquire in school make up an increasingly important component make up an increasingly important component of our stock of knowledge.of our stock of knowledge.
1.Education in the Labor Market: Some Stylized Facts1.Education in the Labor Market: Some Stylized Facts
What factors motivates some workers to What factors motivates some workers to remain in school while other workers remain in school while other workers dropout before they finish high school? We dropout before they finish high school? We assume that workers acquire the skill level assume that workers acquire the skill level that maximizes the present value of lifetime that maximizes the present value of lifetime earnings.earnings.
(1)(1) Present Value of Age-Earnings ProfilesPresent Value of Age-Earnings Profiles
The present value of the earnings stream if the worker The present value of the earnings stream if the worker only gets a high school education is:only gets a high school education is:
46
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tHSHSHSHS
HSHSr
w
r
w
r
w
r
wwPV
(1)
The parameter r is the worker’s rate of discount. There are 47 terms in this sum, one for each year that elapses between the ages of 18 and 64.
The present value of the earnings stream if the worker gets a college diploma is:
465432 1...
11111 r
w
r
w
r
w
r
H
r
H
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HHPV COLCOLCOL
COL
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0
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4 11t tt
COLt r
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H
Direct Costs of Attending College Post-College Earnings Stream
The first four terms in this sum give the present value of the direct costs of a college education, while the remaining 43 terms give the present value of lifetime earnings in the post-college period.
(2)
We assume that a person’s schooling decision maximizes the present value of lifetime earnings. Therefore, the worker attends college if the present value of lifetime earnings when he gets a college education exceeds the present value of lifetime earnings when he gets only a high school diploma, or:
HSCOL PVPV (3)
Goes to College
Quits after High School
FIGURE 1 Earning Streams Faced by a High School Graduate
Dollars
Age
wCOL
wHS
-H
18 22 65
(2) The Wage-Schooling Locus
The wage-schooling locus gives the salary that employers are willing to pay for every level of schooling. The wage-schooling locus is market-determined. In other words, the salary for each level of schooling is determined by the intersection of the supply of workers with that particular schooling and the demand for those workers.
Years of schooling
FIGURE 2 The Wage-Schooling Locus
Dollars
20000
23000
25000
30000
0 12 13 14 18
The wage-schooling locus has three important The wage-schooling locus has three important properties:properties:
a.a. The wage-schooling locus is upward sloping.The wage-schooling locus is upward sloping. More More educated workers must earn more as long as educated workers must earn more as long as educational decisions are motivated only by financial educational decisions are motivated only by financial gains. To attract more educated workers, employers gains. To attract more educated workers, employers must compensate those workers for the costs incurred must compensate those workers for the costs incurred in acquiring an education.in acquiring an education.
b.b. The slope of the wage-schooling locus tells us by how The slope of the wage-schooling locus tells us by how much a worker’s earnings would increase if she/he much a worker’s earnings would increase if she/he were to obtain one more year of schoolingwere to obtain one more year of schooling..
c.c. The wage-schooling locus is concaveThe wage-schooling locus is concave. As with most . As with most production process, there are diminishing returns to production process, there are diminishing returns to getting an education.getting an education.
DefnDefn. The Marginal Rate of Return to Schoolin. The Marginal Rate of Return to Schoolingg
The percentage change in earnings resulting froThe percentage change in earnings resulting from one more year of school is defined to be the m one more year of school is defined to be the marginal rate of return to schooling.marginal rate of return to schooling.
(3) The Stopping Rule, or When Should I Quit (3) The Stopping Rule, or When Should I Quit School?School?
Suppose that the worker has a rate of Suppose that the worker has a rate of discountdiscount r r that is constant; that is, it is that is constant; that is, it is independent of how much schooling the independent of how much schooling the worker gets. The stopping rule that worker gets. The stopping rule that maximizes the worker’s present value of maximizes the worker’s present value of earnings over the life cycle is given by:earnings over the life cycle is given by:
Quit school when the marginal rate of return Quit school when the marginal rate of return to schooling = to schooling = rr
This stopping rule maximizes the worker’s present value of earnings over the life cycle.
Years of Schooling
FIGURE 3 The Schooling Decision
Rate of interest
MRR
r’
r
s’ s*
3. Is Education a Good Investment?3. Is Education a Good Investment?
(1) Is Education a Good Investment for Individuals?(1) Is Education a Good Investment for Individuals?
The rate of return typically estimated for the The rate of return typically estimated for the U.S. generally fall in the range of 5-15 percent. U.S. generally fall in the range of 5-15 percent.
At first glance, an investment in education is At first glance, an investment in education is about as good as an investment in stocks, bonds, about as good as an investment in stocks, bonds, or real estate.or real estate.
資料來源：中央產經論文 - 台灣地區大學教育報酬率時間變化之分析 ( 邱麗芳 )
資料來源：中央產經論文 - 台灣地區大學教育報酬率時間變化之分析 ( 邱麗芳 )
A. The Upward BiasA. The Upward Bias The typical estimates of the rate of return on The typical estimates of the rate of return on
further schooling overstate the gain an further schooling overstate the gain an individual student could obtain by investing individual student could obtain by investing in education because they are unable to in education because they are unable to separate the contribution that ability makes separate the contribution that ability makes to higher earnings from the contribution to higher earnings from the contribution made by schooling.made by schooling.
i.e., Some of the added earnings college i.e., Some of the added earnings college graduates typically receive would probably graduates typically receive would probably be received by an equally able high school be received by an equally able high school graduates who did not attend college.graduates who did not attend college.
Methods to correct this bias:Methods to correct this bias:
a.a. Separating effects of ability and schooling by Separating effects of ability and schooling by including the aptitude-test scores such as IQ.including the aptitude-test scores such as IQ.
b.b. Controlling for all the unmeasured aspects of Controlling for all the unmeasured aspects of ability by using data on twins.ability by using data on twins.
Part of earnings differentials associated with Part of earnings differentials associated with higher levels of schooling are due to higher levels of schooling are due to inherently abler persons obtaining more inherently abler persons obtaining more schooling.schooling.
B. The Downward BiasB. The Downward Bias
a.a. Some benefits of college attendance are not Some benefits of college attendance are not necessarily reflected in higher productivity.necessarily reflected in higher productivity.
b.b. Most rate-of-return studies fail to include fringe Most rate-of-return studies fail to include fringe benefits. benefits.
Fringe benefits, usually as a fraction of total Fringe benefits, usually as a fraction of total compensation, tend to rise as money earnings rise.compensation, tend to rise as money earnings rise.
a.a. Some of the job-related rewards of college are Some of the job-related rewards of college are captured in the form of psychic or nonmonetary captured in the form of psychic or nonmonetary benefits.benefits.
C. Selection BiasC. Selection Bias
The measured rate of return on a college The measured rate of return on a college education may understate the actual return education may understate the actual return for those who choose to attend college. for those who choose to attend college. Likewise, the measured rate of return may Likewise, the measured rate of return may overstate the return that would have been overstate the return that would have been received by those terminating schooling with received by those terminating schooling with higher school had they instead chosen to higher school had they instead chosen to attend college.attend college.
: the earnings in a college-level job of those who : the earnings in a college-level job of those who
choose to go to college.choose to go to college.
: the earning in a high school-level job of those who : the earning in a high school-level job of those who
choose not to go to college.choose not to go to college.
Let : the earnings in a high school-level job of those Let : the earnings in a high school-level job of those
who choose to attend college terminating who choose to attend college terminating
schooling at high school.schooling at high school.
is perhaps less than is perhaps less than
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Measured benefit BMeasured benefit Btt::
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who choose not to attend college were to alter their decisions.
htcE ,
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benefitmeasuredBEEB th
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→When abilities are diverse, the principle of comparative advantage is an important factor in making choices about schooling and occupations.
(1) Is Education a Good Social Investment?(1) Is Education a Good Social Investment?
Some critics have suggested that to a large degree, Some critics have suggested that to a large degree, education acts merely as a “sorting device”.education acts merely as a “sorting device”.
→ →Schooling does nothing to alter productive Schooling does nothing to alter productive characteristics. The education is simply as a filter characteristics. The education is simply as a filter that has the effect of “signaling” which people are that has the effect of “signaling” which people are likely to be most productive.likely to be most productive.
Note: Even if schooling were only a screening Note: Even if schooling were only a screening device, it could have social value. Employers need a device, it could have social value. Employers need a reliable method by which to select employees. reliable method by which to select employees. Investment in schooling sends a signal to the labor Investment in schooling sends a signal to the labor market that one has a certain level of ability. market that one has a certain level of ability.
→→School would have net social value if the decision to School would have net social value if the decision to attend and the success one attained in school sent attend and the success one attained in school sent accurate signals about productive characteristics to accurate signals about productive characteristics to employers in the least costly way.employers in the least costly way.
Either education does enhance worker productivity or Either education does enhance worker productivity or it is a cheaper screening tool than any other that firms it is a cheaper screening tool than any other that firms could use. In either case, the fact that employers are could use. In either case, the fact that employers are willing to pay a high price for an educated work force willing to pay a high price for an educated work force seems to suggest that education produces social seems to suggest that education produces social benefits.benefits.
