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Chapter 9: The Economics of Education

Chapter 9: The Economics of Education. Overview. robust relationship between education and earnings. Why? What determines the level of education selected by an individual?. Human capital model. human capital - an individual’s productive capacity.

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Chapter 9: The Economics of Education

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  1. Chapter 9: The Economics of Education

  2. Overview • robust relationship between education and earnings. • Why? • What determines the level of education selected by an individual?

  3. Human capital model • human capital - an individual’s productive capacity. • human capital may be increased by investments in: • education, • training, and • health care. • individuals with more human capital receive higher pay (since they are more productive).

  4. Optimal investment in education • invest in additional education only if PV(benefits) is at least as large as PV (costs).

  5. Costs of college education • direct costs (tuition, books, supplies), • forgone earnings (opportunity cost of time), and • psychic costs.

  6. Benefits of college education • higher expected earnings, • more pleasant jobs, • lower expected unemployment rates, and • psychic benefits.

  7. Optimal investment in education

  8. Choice between high school and college degree

  9. Factors influencing human capital investment • interest rates, • the age of the individual, • the costs of education, and • the wage differential between high school and college graduates.

  10. Age-earnings profile • Age-earnings profiles are concave (the rate of increase in earnings decreases as individuals age). • This is caused by: • a decline in human capital investment as individuals age, and • sometimes partly due to declines in physical strength as individuals become older.

  11. Gender and age-earnings profiles • historically, women have had shorter expected worklives. • lower incentives for investment in education. • increases in female educational attainment are caused by (and are a cause of) increased expected worklives for women.

  12. Is a college education a good investment? • estimated rate of return: 5-12% • some evidence of an increase in recent years.

  13. Possible biases in estimates of the rate of return to education • ability bias (an upward bias), • nonpecuniary benefits (downward bias), and • selectivity bias.

  14. Is there a socially optimal level of investment in college education? • externalities and subsidies. • signaling model.

  15. Cobweb model • lagged supply response. • applicable in labor markets with high educational and/or training requirements.

  16. Cobweb model (cont.)

  17. Cobweb model (cont.)

  18. Cobweb model (cont.)

  19. Cobweb model (cont.)

  20. Cobweb model (cont.)

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  22. Cobweb model (cont.)

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