Human Capital Flashcards
What is the basic theory for how human capital affects wages
- More education, training or experience = higher productivity = higher wage
How does an individual decide how much education to undertake?
- To induce an individual to take on an extra year of schooling he must be compensated with sufficiently higher lifetime earnings
According to the theory what are the factors that affect the levels of schooling?
- Different discount rates
- Different rates of return to education
- People face different costs
What is the wage-schooling locus?
- Upward slope
- Slope tells us how much wage increases with 1 extra year of education
- concave as there are diminishing returns
What is the marginal rate of return?
- How much an extra year of education is going to affect wages
- Stopping rule: MR = discount rate (r)
- Downward slope due to concave wage-schooling locus
- True MRR is hard to identify, would need identical workers with different rates of discount
What are the 4 sources of empirical challenges?
Factors driving different education leves not included in model:
- Genuine returns to schooling
- Innate Ability
- Selection Effects
- Signalling of productivity
How does innate ability impact the reliability of data?
- 2 individuals are unlikely to face the same wage-schooling locus
- People who take more schooling may have higher innate ability
- Not fully observed in data
- Will affect where the MRR curve sits
- Will overestimate the value of MRR
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What is the issue with trying to include innate ability in the model and how can this be overcome?
- Innate ability correlated to wage and the error term making the OLS biased
- High ability has more education but also naturally has more income
- Need variables correlated to schooling and not wage:
- Quarter of birth
- Affects minimum years in school
- Min school leaving age
- changes in leaving age give two groups with diff education levels
- Harmon and Walker (1995) - esp. relevant in areas where large proportions drop out
- Twin studies (on another flashcard)
- Identical twin comparison, higher OLS estimate
How and why were identical twins used for calculating impact of education on wages?
- Identical twins are thought to have the same innate ability so it was good for comparison
- The results generally give higher estimates for MRR than OLS
- Bonjour et al. (2003) Used 428 twins from St Thomas’ HOspital and found MRR between twins was close to OLS estimate
- ISSUE - wouldn’t identical twins have same discount rate??
How does selection impact the estimates for returns to education?
- An individual who opts for more schooling may earn less than someone who doesnt
- People self select themselves into jobs
- Some people better at low skilled labour and can earn more from it
- This is backed up empirically
- By just comparing wages we may conclude education reduces productivity - don’t see impact (DiD logic)
Explain the role of signalling in the human capital model
- Low skill and high skill claim to be highly productive to get higher wage
- Asymmetric info, employer cannot always observe productivity
- Can use education as a sigalling device
Firms can set required level of education high so that low skilled workers cant afford it
Empiricals - General Equivalence degree (GED)
- Test to give high school dropouts a certificate equal to high school diploma
- Need to look at GED recipients with a grade high enouhg to pass in both states
- Found signialling increases wages by ~19%
What is general human capital?
- a training programme would increase marginal product by the same value in many firms
- Becker (1962) says firms have no incentive to pay as other firms could poach trtained workers
- On the job training in period 0 costs H
- If general VMP increases for all firms so wage has to be equal to VMP in the second period
- initial wage = VMP0 - H
What is specific human capital?
- training increases marginal product in the firm providing the training ONLY
- Becker (1962) costs and returns should be shared
- Other firms value VMP1 = VMP0 so firms can set w1 = VMP0 as no other firm willing to pay higher
- Firm is still hesitant to pay H incase the worker leaves
- Worker and firm are hesitant to invest in specific training
- could design post training wage so w0<w>1<vmp>1
</vmp></w><ul>
<li>Worker wouldnt leave, firm wouldnt want to fire and hire a VMP0
</li></ul>
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</ul>
</vmp></w>
