Transcript Ch. 9. Investments in Human Capital: Education and Training

Ch. 9. Investments in Human Capital: Education and Training
• What are the costs and benefits of obtaining a
college degree?
• What factors affect the number of people
attending college?
• Why do men and women pursue different types
of college degrees?
•Why has the return to a college degree
increased over time?
The “Returns” to Education
Joint Economic Committee Report to Congress (2000)
• Rate of return on an additional year of schooling is quite
substantial. In 1990, this rate averaged almost 10
percent per annum.
• In 1998, the median income of bachelor degree
recipients was $46,285, nearly $20,000 higher than the
median income for workers with only high school
diplomas.
• Increased educational attainment increases the
probability that an individual will remain in the labor
force.
– Among male workers in their 30’s,
• 2.4 percent of college graduates were out of the labor force,
• 7.9 percent for high school graduates.
The “Returns” to Education
Joint Economic Committee Report to Congress (2000)
• Education and training associated with fewer involuntary
job changes.
• Positive relationship between increased education and
good health.
The “Returns” to Education
• “Public” Returns
– Human capital formation has a positive effect on
economic growth.
• If education levels had stagnated at 1959 levels, and
everything else had remained the same, GDP in 1997 would
be 82.6 percent of its current level in real terms.
– More education is associated with reduced
dependence on income transfers.
– Where the population is better educated there are, on
average, fewer crimes.
Salaries by major from WSJ study
Salaries by major from FSB
MODEL OF COLLEGE ATTENDANCE.
If PV(Benefits) > PV(costs) ==> attend
college.
• Benefits:
– increase in earnings
– utility from different type of work.
• Costs
– direct costs (tuition, books, etc.)
– foregone earnings
Estimating the return to education
Suppose a person may attend college from ages 19-22.
Ct=earnings at age t with college degree
Ht=earnings at age t with high school degree
Dt=Ct-Ht
Retirement at age R
T = annual tuition, fees.
PV(Costs) = ( H19 + T) + (H20+T)/(1+r) + (H21+T)/(1+r)2 +
(H22+T)/(1+r)3
PV(Benefits) = D23/(1+r)4 + …… DR/(1+r)(R-19)
NPV = PV(Benefits) – PV(Costs)
Estimating the return to education
NPV=PV(Benefits)-PV(costs)
NPV
internal rate of return
discount rate
•Why does NPV curve slope down?
•If discount rate < IRR  NPV>0  education is a “good”
investment.
Factors influencing rate of return
• wage premium for college graduates
• direct costs of attending college
– Tuition
– scholarships/financial aid
• foregone earnings
– state of the economy
• Individual preferences/abilities:
– discount rates
– Ability
– preferences regarding types of work.
Factors influencing rate of return
• Age
• Expected period of time in labor force:
– Women, childbearing, and career interruptions.
– Rising life expectancy
• Taxation
– Progressivity matters
Despite widespread claims that a college degree is no longer worth the rising price of
tuition, a bachelor’s degree still has about the same return on investment today as it did
in the 80s. College still pays for itself, and then some; it will earn you, on average, a 16
percent return, which is a higher rate of return than on investments in the stock market
(6.8 percent), corporate bonds (2.9 percent), gold (2.3 percent), long-term government
bonds (2.2 percent), or housing (0.4 percent).
Source: http://www.hamiltonproject.org/charts/return_on_investment_to_a_bachelors_degree
Source:
http://www.hamiltonproject.org/charts/median_initial_earnings_growth_in_early_career_by_major
Difficulties with measuring rate of return
• Upward bias
– higher ability may be more likely to go to college.
• Downward bias
– most studies exclude value of benefits which tend to
rise with education.
• Uncertain bias
– most studies exclude “nonpecuniary” differences in
jobs
• Risk, physical demands, etc.
• Dealing with the bias
– Statistical methods
– Twins studies
Recent research on returns to education
Published in Economics of Education Review 27, 2008: 149-160
Recent research on returns to education
Published in Journal of Urban Economics 61, 2007: 542-564.
Recent research on returns to education
Published in Journal of Population Economics 23, 2010: 539-558.
Male-Female Differences in College Degree Choices
Factors determining
degree choice
Male-Female Differences in College Degree Choices
• Explanations for gender differences
– Employer discrimination
– Employee tastes
– Penalties for career interruptions
– Sex differences
• Classroom structure
Rising Returns to Education
Rising Returns to Education
…unlike the 1990s, when companies needed hundreds of thousands of skilled
workers to develop, build and install high-tech systems—everything from
corporate intranets to manufacturing robots—demand for such skills has fallen in
recent years, even as young people continued to flock to programs that taught
them.
Rising Returns to Education
Returns increased in 1990s, flattened in 2000s
• institutions
• minimum wage
• unions
• increases in international trade
• skill biased technological change
• transition to service
• growth of computing
•NOT changes in relative supplies of college and
high school graduates