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 women receive less training than men
and why has the gap shrunk over time?
• Why do men and women pursue different types
of college degrees?
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.
• The return on a college diploma varies from one
concentration area to another.
– recent median starting salary of a college graduate
with a degree in computer science or engineering was
$32,802
– 36% percent higher than the median starting salary of
all college graduates.
– Recent evidence
• 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.
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
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
Human Capital or Signaling?
• Human capital
– education improves productivity of workers.
• Signaling
– education doesn’t improve productivity
– Provides a signal to employers whether
workers are capable of learning in future.
Male-Female Differences in College Degree Choices
Factors determining
degree choice
Male-Female Differences in College Degree Choices
• Explanations for gender differences
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Employer discrimination
Employee tastes
Penalties for career interruptions
Socialization in youth