Bài giảng Labour Market Economics - Chapter 9 Human Capital Theory: Applications to Education and Training

Chapter NineHuman Capital Theory: Applications to Education and Training Created by: Erica Morrill, M.Ed Fanshawe CollegeChapter 9-1© 2002 McGraw-Hill Ryerson Ltd.Chapter FocusFactors that determine the market rate of return to educationIs education economically worthwhile?Is education a predictor of greater productivity?Market signaling and screeningGovernment-funded training programs2© 2002 McGraw-Hill Ryerson Ltd.Human Capital TheoryInvestments are made to improve productivity and earningsCosts incurred with the expectation of future benefitsBenefits must exceed costs by a significant amount3© 2002 McGraw-Hill Ryerson Ltd.CostsDirect costsbooks, tuitionOpportunity cost income forgonePrivate Costs/Social CostsReal Costs/Pecuniary or transfer costs4© 2002 McGraw-Hill Ryerson Ltd.Figure 9.1 Alternative Income StreamsEarnings161822dDirect costsaStream AbeStream BcfStream C5© 2002 McGraw-Hill Ryerson Ltd.Age-Earnings ProfilesIncrease with age but at a decreasing rateHigher for those with more education6© 2002 McGraw-Hill Ryerson Ltd.Choosing an Income StreamSimplifying assumptionsno direct utility or disutility from educationhours of work are fixedincome streams associated with education amounts are knownindividuals can borrow and lend at the real interest rates7© 2002 McGraw-Hill Ryerson Ltd.Human Capital Investment DecisionQuantity of educationmaximizes the net present value of lifetime earnings Human capital wealth can be distributed by borrowing and lendingIncrease education until present value of benefits of additional year equals present value of additional costs8© 2002 McGraw-Hill Ryerson Ltd.Implications of TheoryInvestment should be made early in one’s lifeLittle incentive for individuals experiencing discontinuity in workforce 9© 2002 McGraw-Hill Ryerson Ltd.Factors Influencing EducationIncome tax increase in progressivity of taxes reduce demand for educationStudent loansalter marginal cost of education and levels of educational attainment10© 2002 McGraw-Hill Ryerson Ltd.Optimal Human Capital Investment Expressed in terms of. Costs and benefitsMarginal costs and benefitsRate of return on investment11© 2002 McGraw-Hill Ryerson Ltd.Education and Market EquilibriumInteraction betweenindividuals’ preferences employers’ preferences Human capital positively affects productivity of workers12© 2002 McGraw-Hill Ryerson Ltd.Figure 9.3 Education and Market  EquilibriumYears of EducationWageIIUBEBUAEA13© 2002 McGraw-Hill Ryerson Ltd.Education as a FilterEducation acts as a signal of the productivity of employeesHigher wages are offered if employers believe that education increases productivity14© 2002 McGraw-Hill Ryerson Ltd.Figure 9.4 Offered Wage and Signaling  Cost SchedulesWagesW(y)EducationCL(y)W(y)CH(y)12y*12Cost of education C(y)15© 2002 McGraw-Hill Ryerson Ltd.Empirical Evidence Education and EarningsEarnings increase with age experienceIncrease is most rapid to age 45 or 55 for individuals with the most educationDifferential is wider between groups at ages 45-50 than 20-3016© 2002 McGraw-Hill Ryerson Ltd.Human Capital Earnings FunctionEstimates the rate of return to educationLeast-squares regression of earnings on educationControls for other factors that may affect earnings17© 2002 McGraw-Hill Ryerson Ltd.Signaling, Screening and AbilityDeterminants difficult to controlinnate abilitySignaling/screeningPrivate return on educationSocial return on education18© 2002 McGraw-Hill Ryerson Ltd.Addressing Ability BiasNatural experimentsisolate the influence of education from unobserved ability factorsresearch on twinscompulsory school attendance lawsproximity to college findings19© 2002 McGraw-Hill Ryerson Ltd.Increased Returns to Education and InequalityVariation of returns to schooling over timeIncreased returns have coincided with increases in income inequality20© 2002 McGraw-Hill Ryerson Ltd.TrainingGeneral TrainingSkills used in various firmsFirms will offer higher wage for this trainingTrainee willing to bear the cost since higher wages offered for these skillsSpecific TrainingTraining useful to the firm that provides the trainingTrainee is unwilling to bear the cost because no higher earningsFirm does not have to pay higher wages because other firms are not competing for such trainees21© 2002 McGraw-Hill Ryerson Ltd.Figure 9.7 a Costs, Benefits and Financing of TrainingWa=VMPaTimeWagesVMPCosts and Benefits of Trainingcostsbenefits0VMP*VMPtt*training22© 2002 McGraw-Hill Ryerson Ltd.Figure 9.7 b Costs, Benefits and Financing of TrainingWa=VMPaTimeWagesVMPSpecific training as a shared investment0t*trainingEmployer’s costs Employee’s benefitsVMP*VMPtEmployee’s costsWt Employer’s benefitsW*23© 2002 McGraw-Hill Ryerson Ltd.Figure 9.7 c Costs, Benefits and Financing of TrainingWa=VMPaTimeWagesVMPEarnings growth with gradual training0VMP*VMP0Employer’s costs Employer’s benefits Employee’s benefitsEmployee’s costsWtW*24© 2002 McGraw-Hill Ryerson Ltd.Appropriate Role of GovernmentPrivate markets may not provide socially optimal amounts of training imperfect informationregulatory restrictionscontract problemsTraining subsidies to disadvantaged could increase working hours raise wages above the poverty line25© 2002 McGraw-Hill Ryerson Ltd.Evaluation of Government Training ProgramsDifficulties in evaluationno opportunity to observe earnings in the absence of trainingno control groupmany variables 26© 2002 McGraw-Hill Ryerson Ltd.End of Chapter Nine27© 2002 McGraw-Hill Ryerson Ltd.