Addison Wesley Longman, Inc. © 2000 Chapter 9 Investments in Human Capital: Education and Training

Addison Wesley Longman, Inc. © 2000 EDUCATION & TRAINING Education/Training - raises stock of human capital Migration/Job Search - raises value of the stock Societal Choice and Individual Choice –Global competition, high tech jobs etc. –US schools fare poorly (6th out of 6 in table 9.4) Human capital is $305,000/person in US –$387,000 in Germany –$563,000 in Japan –59% of wealth in US –64% of wealth worldwide

Addison Wesley Longman, Inc. © 2000 Costs and Benefits Costs –out of pocket (tuition) –lost earnings –psychic costs Benefits –wages –job satisfaction –non-market benefits (personal satisfaction, reading, self-esteem)

Addison Wesley Longman, Inc. © 2000 Examples – Costs/Benefits 44% of high ability students from low income families attend college. 74% from high income families go. Costs matter When financial aid rises more slowly than tuition, these rates fall even lower. During Vietnam War enrollment rates rose 7%. One study showed that your draft lottery number affected college enrollment choices.

Addison Wesley Longman, Inc. © 2000 The Optimum Acquisition of Human CapitalFigure 9.1

Addison Wesley Longman, Inc. © 2000 Alternative Earnings StreamsFigure 9.2

Addison Wesley Longman, Inc. © 2000 Optimal Choice Gap between high school and college determines wage benefits Recession in early 90s: –high school grads lost 15% of their salaries –college grads lost 8% –gap rose and more people went to college –4 years later: college grads’ wages fell while high school grads wages rose. Gap fell again.

Addison Wesley Longman, Inc. © 2000 Money Earnings (Mean), for Full-Time, Year-Round Male Workers, 1997 Figure 9.3

Addison Wesley Longman, Inc. © 2000 Money Earnings (Mean), for Full-Time, Year-Round Female Workers, 1997 Figure 9.4

Addison Wesley Longman, Inc. © 2000 The Increased Concavity of Women’s Age/Earnings ProfilesFigure 9.6

Addison Wesley Longman, Inc. © 2000 GENDER DIFFERENCES Why do women with college degrees benefit less particularly in terms of experience? Experience seems to be less important –may be choosing jobs where experience is less important (non-corporate career paths) –maybe taking time out of labor market so that age is not a good measure of experience Overall: women might choose less education –gap is smaller –less time in labor market to receive benefits Women receive > 50% of college degrees. Why?

Addison Wesley Longman, Inc. © 2000 RETURN ON EDUCATION Wage estimates: 5-12% return Biased estimates? –Upward bias - people who become educated are on average smarter, more ambitious etc and would have received higher wages anyway. –Downward bias - many benefits are left out. This only measure the dollar value. –Selection bias - Managers may be poor mechanics!

Addison Wesley Longman, Inc. © 2000 Investment in On-the-Job Training over the Life CycleFigure 9.5

Addison Wesley Longman, Inc. © 2000 The Benefits to Workers of Educational SignalingFigure 9.7

Addison Wesley Longman, Inc. © 2000 The Lifetime Benefits and Costs of Educational SignalingFigure 9.8

Addison Wesley Longman, Inc. © 2000 The Labor Market for EngineersFigure 9A.1

Addison Wesley Longman, Inc. © 2000 The Labor Market for Engineers: A Cobweb ModelFigure 9A.2

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