6. Human Capital Flashcards
What is the cost of a year of education?
The fees paid plus the opportunity cost of the foregone wage
What is the present value?
The fact that we weigh future earnings with a discount rate (r) since we prefer to earn things now
Properties of wage-schooling locus
- Upward sloping
- Slope gives the effect of an extra years schooling in wages
- Concave
What variables determine when you should quit school?
- Difference in MRR
- Different time preference (r)
- Difference in uni cost
Ability bias
The idea that individuals who would earn more anyway invest in more schooling
Selection bias
The idea that individuals who gain more from education invest in more schooling
3 ways of working out how much an additional year of education is worth
- Control for observable differences
- Study twins
- Instrumental variables
Explain what instrumental variables are and how they work
They are something exogenous which causes individuals to have different amounts of education but has no co-variance with ability e.g. quarter of birth
Signalling model
The theory that education signals pre existing differences in productivity, employers use the signal to infer productivity
What is necessary for high productivity workers to have access to more education than low productivity workers?
Education must be more costly to low productivity workers
Evaluate testing signalling vs human capital theories
•it is difficult to distinguish between the two theories since they both predict wages and education are correlated
•Arteaga 2018 measured the
effect of a reduction in the curriculum in university of Columbia. Wages fell by 16% suggesting returns to education is at least partly due to human capital
What is general human capital
General training which increases the workers marginal productivity by the same amount in many firms
Why don’t firms have an incentive to do general human capital training?
Other firms can poach their trained workers
Specific human capital
When training only increases productivity of the worker for that one firm
Why is it good to share the investment of specific training?
By sharing the investment both parties have an incentive not to terminate the relationship and impose a cost on the other party
