ch 7 the theory of human capital l.
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Ch. 7: The Theory of Human Capital. Analysis of importance of education and training. Human capital: embodied in worker; invest in HK just like invest in other types of K. Why invest in HK? Because workers expect a return in enhanced earnings. Pattern of Education and Earnings for Men.

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ch 7 the theory of human capital
Ch. 7: The Theory of Human Capital
  • Analysis of importance of education and training.
  • Human capital: embodied in worker; invest in HK just like invest in other types of K.
  • Why invest in HK?
    • Because workers expect a return in enhanced earnings.
pattern of education and earnings for men
Pattern of Education and Earnings for Men
  • See Figure 7.1
  • Shows age-earnings profiles for different levels of education.
  • Specific features:
    • 1.
    • 2.
    • 3.
education as an investment
Education as an Investment
  • Gary Becker:
  • Is education a good investment?
  • Compare costs to benefits across the entire lifetime.
  • Costs include opportunity costs.
  • Overall:
hk investment decision
HK Investment Decision
  • Compare two “life strategies”:
  • 1) Finish high school and start working FT at age 18 to age 65.
  • 2) After h.s., go to college for four years, then work FT from age 22 to age 65.
    • * direct costs:
    • * opportunity costs:
the two strategies
The Two Strategies
  • Compare lifetime earnings for HS versus C: $ earnings:
    • HS:
    • C:
  • BUT need to know these two figures in present value terms.
    • HS:
    • C:
    • Present value: more distant in time the $ is received, the lower its current/present value.
    • FV = $106; PV = $100.
    • FV must be discounted to get PV.
implications of hk theory
Implications of HK Theory
  • 1.  college costs should lead to  college attendance due to  net return. (yes observed in real world)
  • 2. Most students young. (yes)
  • 3. Lower enrollment rates for those not expecting to work continuously (yes).
  • 4. Individual with more education has higher earnings in peak years (yes).
formal model of hk investment
Formal Model of HK Investment
  • Developed by Becker; has D for HK curve and S of investable funds curve.
  • These S and D curves differ across individuals; implies existence of earnings differentials too.
  • Why differences in S? Due to differences in opportunity:
more on formal model
More on Formal Model
  • Why differences in D?
    • 1.
    • 2.
    • 3.
  • Policy solutions:
    • 1.
    • 2.
    • 3.
  • Extension to HK Theory: HK as signal (screening device).
on the job training ojt
On-the-Job Training (OJT)
  • OJT like any other HK investment but now some of OJT investment costs (and benefits) will be shared between worker and employer.
  • General OJT:
  • Specific OJT:
who pays for training
Who Pays for Training?
  • General OJT: worker can use this training to  productivity at many firms so employer won’t pay; worker must pay with reduced wages during training but then benefits with increased wage after training.
  • Specific OJT: the training is specific to this firm; worker can’t “take it with him” so firm willing to pay for it, but then reaps some of the benefits of the increased productivity post-training.
4 implications of investment in ojt
4 Implications of Investment in OJT
  • 1. For workers w/specific training:
  • 2. Wmin might  firm’s willingness to provide training since cannot w during training.
  • 3. Specific OJT:
  • 4. Shape of age-earnings profile:
intermittent work and women s earnings
Intermittent Work and Women’s Earnings
  • See Figure 7.10: shows age/earnings profiles for men and women (college grads and just HS).
  • Two things to note:
  • 1)
  • 2)
why differences in age earnings profiles
Why Differences in Age/Earnings Profiles?
  • Three reasons:
  • 1.
  • 2.
  • 3.
  • Why intermittent work causes flatter age/earnings profiles?
  • 1. Less OJT investment (due to less chance of return to investment).
  • 2. Less access to occupations with much specific OJT (so women stuck in secondary sector).
  • 3) HK depreciates during time out of LF  difficulty of mid-career re-entry