Human Capital Flashcards
Outline the correlation between education and three factors….
1 - Labour force participation rates (positive)
2 - Unemployment rates (negative)
3 - Earnings (positive)
Outline the schooling model, Jacob Mincer, 1958
Workers acquire the education level that maximizes the PV of lifetime earnings
Idea: Compare present value of earnings stream of i) going to university and ii) not going to university
Outline the costs of education to the individual
- Direct cost H: tuition, books, and fees
2. Opportunity cost Whs: A year spent in university is a year spent out of the labour force (i.e., forgo some earnings)
What effect dies H have on schooling decision?
Higher fees makes schooling less attractive
What effect does the wage differential have on schooling decision?
Large wage differential makes it more attractive to gain an extra year
What effect does r have on schooling decision?
A higher r means that future income is worth less today − skip university
How is the wage-schooling locus determined?
Market determined: salary for each level of schooling is determined by the intersection of the supply and demand for
those particular workers
Outline three properties of the wage-schooling locus
Upward sloping: To attract educated workers, employers must compensate those workers for the costs incurred in acquiring an education
Slope: provides the rate of return to schooling (∆w/∆s)
Is concave: Law of diminishing returns applies to human capital accumulation. Each extra year of schooling generates less incremental knowledge and lower additional earnings than previous years.
Define: Marginal Rate of Return to Schooling (MMR)
The % change in earnings from one year more in school
How is the optimal level of schooling found?
Set MMR=r (interest rate)
Study for an extra year so long as return to schooling is greater than market return
