The Human Capital Model

1. The Human Capital Model

2. Human Capital Individuals possess knowledge and skills which affect their productivity. The knowledge and skills are their human capital.

3. Investments in Human Capital There are many investments that individuals and firms make that represent investments in human capital. These include education and job training.

4. Societal Discrimination Versus Labor Market Discrimination Societal discrimination (prelabor market discrimination) – societal influences that cause individuals to make decisions that adversely affect their status in the labor market Example: Young women with an aptitude for math and science do not enter those fields because they are socialized to believe that those are men’s fields and women aren’t good at them. Labor market discrimination – treating two individuals with equal qualifications differently for reasons unrelated to their productivity Example: Employers do not hire or promote women in particular types of jobs. Labor market discrimination lowers women’s economic status directly when the employer refuses to hire or promote them. It can also lower their status indirectly by reducing their incentives to invest in themselves and to acquire particular job qualifications.

5. Educational Attainment, 1999 (Ages 25-64) Hispanics are much more likely than whites and blacks to drop out of high school.

6. Educational Attainment, 1999 (Ages 25-64) Blacks are more likely than whites and Hispanics to complete high school, but go no further.

7. Educational Attainment, 1999 (Ages 25-64) Whites are more likely to complete college than blacks and Hispanics.

8. Educational Attainment, 1999 (Ages 25-64) Black and Hispanic women are more likely to attend college and more likely to complete college than their male counterparts.

9. Educational Attainment, 1999 (Ages 25-64) White women are more likely to have dropped out of college than white men. (Among young people, however, there are more women than men who graduate from college.)

10. Higher Education (2007-2008)Percentage of Degrees Awarded to Women *First professional degrees are those awarded in post-college professional training programs such as medicine, law, business, dentistry, pharmacy, veterinary medicine, and theology. Women receive more Associate’s, Bachelor’s, Master’s and Doctorates, but slightly fewer first professional degrees. http://nces.ed.gov/fastfacts/display.asp?id=72

11. Percentages of Bachelor’s Degrees Awarded to Women by Selected Fields (1996-1997) Women are much less likely than men to major in engineering, computer & information sciences, economics, and architecture. They are much more likely than men to major in education, health, and home economics.

12. Experience-earnings profile indicates the annual earnings at each age or at each number of years of experience

13. experience-earnings profile The experience-earnings profile tends to rise quickly with the first few years of experience and then flatten out. $ years

14. $ years experience-earnings profile The experience-earnings profile tends to be flatter for the high school graduate than for the college graduate. This is because college graduates tend to receive more on-the-job training which increases their productivity. college graduate high school graduate

15. Decision to attend college Consider an individual who is considering attending college. He would not take a job while going to school. He would incur some direct costs for tuition and books. Upon completing college he would take a job. His experience-earnings profile would look like this. $ Earnings with college years Direct Costs

16. Decision to attend college $ If he did not attend college, his experience-earnings profile would look like this. Earnings without college years

17. Decision to attend college $ Earnings with college If we combine the two profiles, we can examine his decision by comparing the present value of the costs and benefits. Earnings without college years Direct Costs

18. Decision to attend college $ Earnings with college Costs include both direct and indirect costs (foregone earnings). Gross benefits from college Earnings without college The benefits of college include the higher earnings. Foregone earnings years Direct Costs

19. - +Cn) C H T Y (Y å n n PV = (1 + r) n - 18 = 18 n Calculation of present value r = rate of discount T = age at retirement YnC = earnings at age n with a college education YnH = earnings at age n with a high school degree Cn = direct costs of college education at age n If PV > 0, it pays to obtain the extra education

20. Implications of the model It pays to invest in human capital when one is young and there are more years to benefit. How much investment is done depends on how long the individual expects to be in the labor force. Investment in human capital is also influenced by macroeconomic factors, such as the current unemployment rate which influences the probability of employment and therefore foregone earnings.

21. Decision to attend college Consider an individual who expects to take time out of the labor force for child-rearing. She expects to drop out of the labor force in year A and return in year B. $ Earnings with college Earnings without college Foregone earnings years Direct Costs A B

22. Her skills become rusty or maybe even obsolete while she is out of the labor force. She needs to retool. So when she returns to the labor force, she is on a lower earnings curve. $ Earnings after dropping out of LF Earnings without college Foregone earnings years Direct Costs A B

23. The benefits of the higher earnings of college relative to high school are much smaller than if she had not dropped out of the labor force. $ Earnings after dropping out of LF Earnings without college Gross benefits from college Foregone earnings years Direct Costs A B

24. The gross benefits (GB) may not be sufficient to compensate for the direct costs and foregone earnings. So she might decide not to attend college. $ Earnings after dropping out of LF Earnings without college Gross benefits from college GB Foregone earnings years Direct Costs A B

25. Implications for occupational choice A woman who anticipates spending time out of the labor force might choose a field for which her skills are less likely to become obsolete during her absence from the labor force. For example, she might choose to teach English or History rather than entering a field where technological change is an important factor.

26. Other factors that affect career decisions “Gender-appropriate” traits & competencies: Women may be socialized to believe that certain fields are appropriate only for men and that only men are really good at them.

27. Other factors that affectcareer decisions Biased evaluations: Studies have found that, among both male and female college students, identical papers were given higher ratings on such dimensions as value, persuasiveness, profundity, writing style, and competence when the respondent believed the author to be male rather than female.

28. Other factors that affect career decisions Discrimination by educational institutions - American women were not admitted to higher education until Oberlin College opened its doors to women in 1837. Women did not gain entrance to medical school until 1847, and it was not until 1915 that the American Medical Association accepted women members. Women continued in many cases to be discriminated against in admissions and financial aid policies long after they gained formal admittance.

29. Other factors that affectcareer decisions Subtle Barriers:A lack of female role models and mentors may also effect a woman’s choice of career.

30. Factors affecting women’s increased educational attainment • More opportunities are available to women since the passage of the anti-discrimination laws of the 1960s. • Changing social attitudes about the role of women. • The passage and enforcement of Title IX in 1972 as an amendment to the Civil Rights Act of 1964. • The birth control pill, which became more widely available in the late 1960s and early 1970s.

31. Title IX To remedy discrimination in educational institutions, in 1972 Congress passed Title IX of the Educational Amendments to the Civil Rights Act of 1964. It prohibits discrimination on the basis of sex in any educational program or activity receiving federal financial assistance. It covers admissions, financial aid, and access to programs and activities, as well as employment of teachers and other personnel.

32. Title IX Title IX had a particularly dramatic impact on athletics. Support and facilities for women athletes have greatly increased since its passage. When it was enacted in 1972, 50% of American boys participated in school sports compared to only 4% of girls. By the mid-1990s, 1/3 of high school girls participated in school sports and almost half of college varsity players were female. In the 1976 Olympics, only one out seven athletes was female. By the 2000 games, 42% of the athletes were women, and for the first time women competed in the same number of team sports as men.

33. On-the-job training Two types: • General training -- training that can be used at any firm (for example, word processing). • Firm-specific training -- training that is useful only to the firm where you are currently working (for example, computer software used only by your firm)

34. On-the-job training On-the-job training entails costs. Some costs are direct, such as expenses for instructors or materials. Other costs are indirect. The attention of the worker and his or her coworkers or supervisor is diverted from production activities to training. The resulting decline in output represents an opportunity cost to the firm of the training.

35. Who pays the costs of on-the-job general training? Since the worker can leave and take the skills to other firms, the firm will not be willing to pay the costs of general training. So the worker pays the costs. How? The worker pays the costs by initially accepting a wage below what could be obtained elsewhere without training. The wage is the worker’s productivity net of training costs. As the worker becomes more skilled, his/her earnings catch up and eventually exceed what she could have earning without training. The amount by which earnings exceed what could have been made without training represents the benefits of the training.

36. General training $ Earnings with training An individual will invest in general training if the benefits are sufficient to compensate for the costs. Gross benefits Earnings without training Costs Experience

37. How do expectations of discontinuous LF experience influence an individual’s investment in general training? $ If an individual expects to drop out of the labor force at year A and return at year B, the gross benefits (GB) are reduced. If they are not sufficient to compensate for the costs, the individual will not make the investment. Earnings with training Earnings after dropping out of LF Gross benefits GB Earnings without training Costs Experience A B

38. Who pays the costs of firm-specific training? If the worker were to be laid off, he/she would be unable to reap the benefits of the firm-specific training. So the worker would not be willing to bear all the costs of the training. If the worker were to quit, the firm would lose its investment in the worker. So the firm would not be willing to bear all the costs of the training either. So the worker and the firm share both the costs and the benefits of the training.

39. How do the worker & the firm share the costs & benefits of firm-specific training? The worker pays part of the costs by initially accepting a wage below what could be obtained elsewhere without training. The firm pays part by paying the worker more than the worker’s productivity net of training costs. Later, when the worker is more productive, the worker earns benefits by receiving more than he/she would have earned if he/she worked elsewhere without training. The firm receives benefits by paying less than the worker’s productivity with training.

40. Firm-specific training Firm’s benefit $ Productivity with training Wage with training Worker’s benefit Worker’s cost Wage without training Firm’s cost Experience

41. Implications of firm-specific training • The worker has invested in the firm and the firm has invested in the worker. • Workers with firm-specific training are less likely to quit and less likely to be laid off than workers with no training or only general training. • Employers will be concerned with the employment stability of a worker hired with such training in mind.

42. More implications of firm-specific training A firm will be less willing to invest in a worker if it is uncertain that it will reap sufficient benefits of the training. Thus, if a firm thinks that a worker may drop out of the labor force, it is less likely to train that worker. If a worker expects a discontinuous labor force experience, the benefits of specific training will be reduced. Furthermore, if the worker is uncertain that she will be able to get back her old job with the higher wages from training, the benefits are reduced even further. Consequently, a worker who expects a discontinuous labor force experience will be less likely to invest in firm-specific training.

43. In a study that examined job turnover, it was found that women’s higher probability of leaving the labor force can explain some of the gender training difference. However, a major portion remains unexplained after this and other determinants of training are taken into account. This suggests that differences in the amount of training men and women acquire may not be fully explained by factors emphasized in the human capital model and that discrimination may play a role.

44. Human capital theory & occupations Given that women spend less time in the labor market and have discontinuous working careers, they will choose an occupation with the following characteristics: • Less investment in on-the-job training. • Requires no firm-specific training. • Depreciation of skills from time spent out of market is minimal.

45. Human capital theory & earnings Human capital theory also explains the differences in earnings. For men and women with the same level of formal education, you will observe a higher earnings profile for males because they undertake substantial on-the-job training in comparison to women.

46. Other supply-side factors Women are more likely to quit their jobs for family-related reasons, and this negatively effects their subsequent earnings. This gender difference in the pattern of quits is concentrated among workers with a high school education or less. Little gender difference in this respect is found among those who have attended college. The work force attachment of college-educated women may be more nearly equal to their male counterparts.

47. Other supply-side factors The presence of children has been found to have a negative effect on women’s wages. Women with children earn less than women without children, even after adjusting for experience. One explanation for this finding is that in the past the birth or adoption of a child often resulted in women severing their tie to the firm and losing returns to firm-specific training. The availability of maternity leave significantly reduces this negative effect because it enables women to take a short amount of time out but maintain their attachment to the firm.

48. Other supply-side factors Married men earn more than single men, whether or not children are present. This could partly reflect a selection of men with higher earning potential into marriage or discrimination in favor of married men by employers. Evidence indicates that higher productivity is also an important factor. This may reflect greater motivation or commitment of married men to their jobs given some adherence to traditional gender roles in the family.

49. Other supply-side factors Women may be “tied movers” or tied stayers.” The husband’s career often has priority over the wife’s career. So the family may move when the husband’s career would benefit but the wife’s career is worse off. Also, the family may stay where it is because the husband’s career is better off there, despite the fact that the wife’s career would benefit by moving.

50. Other supply-side factors If women give greater priority than men to family concerns, they may restrict the amount of daily commuting they are willing to do, their hours and work schedules, or their availability for work-related travel. Such constraints could adversely affect their occupational choices and reduce their earnings relative to men’s.