Human Capital
Labor Economics VSE 27.04.2011
The Concept of Human Capital
Human Capital is the abilities and skills of any individual, esp those acquired through investment in education and training, that enhance potential income earning.
Sources of HC:
formal schooling,
on-the-job training,
experience,
abilities the individuals are born with.
Human Capital
Highly mobile,
Cannot be inherited,
Cannot be sold or used as collateral for a loan,
Yields a rate of return (higher earnings) like physical capital,
Risky.
HC Investment
Forms of HC Investment
Education
Costs: direct costs and opportunity costs,
Benefits
On-the-Job Training
General
Specific
Migration
Search for new jobs
Evaluating Investment in HC T
t
t t
T r
B B B
PV
1
1,..., ) (1 )
(
Age-Earnings With and Without College
High School curve is age- earnings profile if a person does not attend college.
College curve is age-earnings profile if attends college
Total cost of college :
direct costs, tuition (1)
indirect costs, lost earnings (2)
Benefit of attending college is increase in earnings (3).
Age Annual
Earnings
22 65
Future Extra Earnings (3)
High School
College
Indirect Costs (2)
Direct Costs (1)
The Demand for Schooling: Predictions
Present-oriented people are less likely to go to college than forward-looking people (other things equal).
Ex.: Health, life expectancy
Most college students will be young.
College attendance will decrease if the cost of college rise (other things equal).
College attendance will increase if the gap between the earnings of college graduates and high school graduates widens (other things equal).
The Wage-Schooling Locus (W-SL)
W-SL gives the salary for every level of
schooling.
Properties:
Upward sloping.
Slope of W-SL ( w/ s):
increase in earnings
from extra year in school
Concave.
Diminishing Returns to Education
The increases in
knowledge decline with each additional year of schooling.
Rate of return schooling
= % change in earnings from extra year in school
Return to 13th year of schooling =
$3,000/$20,000 15%
Return to 14th year of schooling =
$2,000/$23,000 8.7%
The Schooling Decision
People get education until the point where the
benefit of one more year equals its cost
Benefit of schooling
(return)
Cost of schooling Marek
Schooling Decision: different rates of discount
Statistical Problem
Hard to measure returns to education
Those with more ability (i.e., intelligence, motivation, and self-discipline) are more likely to go to college.
Even without a college degree, they would have earned more than those who decided not to go to college.
High earnings of college graduates reflect both
greater ability
Schooling
rate of return to schooling is overstated
Different Abilities
Why Does Schooling Vary?
Discount rates are different
Different abilities
Credit constraints
Returns to college are uncertain
Life Cycle and HC Investment
Why people invest to HC throughout their life cycle?
HC depreciates
Returns to HC change over time
People update their preferences
The age-earnings profile implied by HC theory
Upward-sloping and concave
The age-earnings profile (real data)
Properties of age-earnings profiles:
Highly educated workers earn more than less-educated workers.
Earnings rise over time, but at a decreasing rate.
The age-earnings profiles of different education groups diverge over time.
On-the-job training
Types:
General HC
Skills used in various firms
Accounting, word processing, college degree
Firms will offer higher wage for this training
Firm-specific HC
Training useful to the firm that provides the training
Will firms provide general training to their workers?
On-the-job training: Who pays?
General HC
Trainee willing to bear the cost since higher wages offered for these skills
Firm-specific HC
Costs split by the worker and the firm
Implications
In case of specific training
Both worker and firm share returns
Firm pays worker less than MRP.
Worker received more than in other jobs.
Neither worker nor firm want to terminate contract
Worker granted lifetime tenure.
Lower overall turnover.
“Last hired, first fired” in bad times, lower turnover among senior workers.
Specifically trained workers often go on temporary layoffs, wait to be recalled.
Criticism of Human Capital Theory
1. Human capital theory:
education improves work productivity
2. Signaling and screening hypothesis:
education does not improve worker’s productivity, employees “signal” their high productivity/ability with higher level of education
Education is less costly for higher ability workers
Low ability do not get education
If an ability test could achieve the same ends, then education is a waste of resources
Gender Differences in HC
Gender Differences in HC
11% 8,8%
6,9%
5,3%
0%
2%
4%
6%
8%
10%
12%
work all years no work, age 25-29 no work, age 25-34 no work, age 25-39
Internal Rate of Return for a Woman's College Education with Different Workforce Patterns
The Gender Gap in Earnings:
Explanations
If HC is different between men and women then there must be differences between men and women in education and experience.
How to measure HC?
Education - # of years of completed schooling,
Experience - # of years of work experience.
A. Education gap
A1. Percent College Graduates by Gender &
Age, 2002
33
28 29
22
29 28,5
32 32
0 5 10 15 20 25 30 35
25-34 35-44 45-54 55-64
Male Female
B. Occupation choice
a. Degrees in this category are largely doctor’s degrees in law, medicine, and dentistry
B1. Occupation choice
B. Gender Differences in Experience
Year Age
25 35 45
1920 5.6 11.8 16.4
1950 5.9 10.6 17
1980 6.2 11.7 18.3
1986 6.5 13.5 19.3
max 7 17 27
Table: Average Years of Work Experience for Working Women by Age and Year
Evidence
Choice or Discrimination?
Part of the gender wage gap is the result of rational choices made by women?
To work fewer/flexible hours
To choose safer less effort-intensive occupations
Occupational segregation may be due to women choosing occupations, such as nursing and teaching, with skills that are useful in home production.
To take time off for childcare
Due to shorter work careers, it is rational for women to invest less in education and training.
Their stock of human capital will deteriorate when they are out of the labor force.
Alternative Explanation of Gender Gap
Do women invest less in human capital because of discrimination?
Women stay out of the labor force because of the low pay in the labor market.
If discrimination declined, then more women may decide to remain single or childless.
Homework
Borjas (5e): Chapter 6
HW#3 due Wednesday, April 27 before the class!!!
Education and health (US)
Education and Life Expectancy
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