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Ch. 7: The Theory of Human Capital. Analysis of importance of education and training. Human capital: embodied in worker; invest in HK just like invest in other types of K. Why invest in HK? Because workers expect a return in enhanced earnings. Pattern of Education and Earnings for Men.
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Ch. 7: The Theory of Human Capital • Analysis of importance of education and training. • Human capital: embodied in worker; invest in HK just like invest in other types of K. • Why invest in HK? • Because workers expect a return in enhanced earnings.
Pattern of Education and Earnings for Men • See Figure 7.1 • Shows age-earnings profiles for different levels of education. • Specific features: • 1. • 2. • 3.
Education as an Investment • Gary Becker: • Is education a good investment? • Compare costs to benefits across the entire lifetime. • Costs include opportunity costs. • Overall:
HK Investment Decision • Compare two “life strategies”: • 1) Finish high school and start working FT at age 18 to age 65. • 2) After h.s., go to college for four years, then work FT from age 22 to age 65. • * direct costs: • * opportunity costs:
The Two Strategies • Compare lifetime earnings for HS versus C: $ earnings: • HS: • C: • BUT need to know these two figures in present value terms. • HS: • C: • Present value: more distant in time the $ is received, the lower its current/present value. • FV = $106; PV = $100. • FV must be discounted to get PV.
Implications of HK Theory • 1. college costs should lead to college attendance due to net return. (yes observed in real world) • 2. Most students young. (yes) • 3. Lower enrollment rates for those not expecting to work continuously (yes). • 4. Individual with more education has higher earnings in peak years (yes).
Formal Model of HK Investment • Developed by Becker; has D for HK curve and S of investable funds curve. • These S and D curves differ across individuals; implies existence of earnings differentials too. • Why differences in S? Due to differences in opportunity:
More on Formal Model • Why differences in D? • 1. • 2. • 3. • Policy solutions: • 1. • 2. • 3. • Extension to HK Theory: HK as signal (screening device).
On-the-Job Training (OJT) • OJT like any other HK investment but now some of OJT investment costs (and benefits) will be shared between worker and employer. • General OJT: • Specific OJT:
Who Pays for Training? • General OJT: worker can use this training to productivity at many firms so employer won’t pay; worker must pay with reduced wages during training but then benefits with increased wage after training. • Specific OJT: the training is specific to this firm; worker can’t “take it with him” so firm willing to pay for it, but then reaps some of the benefits of the increased productivity post-training.
4 Implications of Investment in OJT • 1. For workers w/specific training: • 2. Wmin might firm’s willingness to provide training since cannot w during training. • 3. Specific OJT: • 4. Shape of age-earnings profile:
Intermittent Work and Women’s Earnings • See Figure 7.10: shows age/earnings profiles for men and women (college grads and just HS). • Two things to note: • 1) • 2)
Why Differences in Age/Earnings Profiles? • Three reasons: • 1. • 2. • 3. • Why intermittent work causes flatter age/earnings profiles? • 1. Less OJT investment (due to less chance of return to investment). • 2. Less access to occupations with much specific OJT (so women stuck in secondary sector). • 3) HK depreciates during time out of LF difficulty of mid-career re-entry
