Lecture 07 - Investment In Human Capital Flashcards
What are the other sources of wage differences?
- Compensating differentials - wages vary among workers because jobs are different
- Labour market imperfections - differentials generates while matching workers with jobs
- Labour market discrimination - ethnic differentials
What’s the problem with the schooling model?
- does not explain the shape of the age earning profile after completing schooling
- Rise in earnings with labour force experience
Two types of on the job training?
- General Training - enhances productivity of individual for all types of jobs
- Specific Training - only enhances productivity of the individual for one particular type of job
Do earnings rise over time?
Yes, but at a decreasing rate
What are the problems with Natural experiments approach on twin studies?
- twins not representative sample of twins
- not identical in ability at birth, more motivated twin has more schooling and higher earnings
- different childhood events affect abilities later in life
- schooling affected by stochastic labour market opportunities
- one twin gets offer of high wage job that induces twin to leave school
Problems with measuring ability?
- Test scores imperfect measure of ability
- Test scores depend on schooling
- other factors correlated with schooling and have an effect on wages but not seen by Test scores (eg family background)
What is the ability bias?
Ability bias ~
- effect in wages independently of education
- also positively correlated with schooling
- typically not controlled for in regression
Possible solutions to the ability bias?
- measures of ability (use IQ tests)
- Natural experiments (twin studies)
- instrumental variable approach (quarter/month of birth, 1968 France riots, distance to school)
Ability bias estimates of the return without accounting for ability
- A and B same discount rate (r)
* each worker different wage - schooling locus (different ability)
Why aren’t people acquiring education?
- liquidity constraints (credit and savings market imperfection)
- heterogeneity in returns to education
- inadequate supply
- informational asymmetries/wrong expectations
- Bias in OLS estimates
Education how are social returns superior to private returns?
- social engagement (charging local committee, dinner party, voting)
- Criminality and violence
- labour mobility (length of compulsory education and mobility of individuals at the lowest levels of educational attainment
- spillover on children - education of mothers and health of offspring
- knowledge externalities
Problems of measurement error bias the estimator downwards:
- individuals state duration of studies inaccurately
- better trained workers work longer amount of time over year
- studies underestimate returns to education to a degree varying between 10% and 30%
Workers compare investment costs with present value of expected future benefits. They acquire educational level that…
• maximises present value of lifetime earnings
Workers choice determined by?
- benefits of education (earning differentials)
- costs of education (cost of education and foregone earnings)
- rate of discount
Sources of human capital differences?
- innate ability
- schooling
- Training
- school quality and other non-schooling investment
- pre labour market influences
