Download Sec4a - The University of Utah

Human Capital
Investment The process of increasing the household’s
holdings of human wealth either by engaging in
formal or informal training or by adding
household members.
Examples of Human Capital
Investment...
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getting a college education
teaching your son or daughter how to cook
learning carpentry skills in an apprentice
program
getting married
having a child
reading the newspaper
Theory of Human Capital Investment
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People are investing in human capital by going to school.
The returns (or benefits) of this human capital investment include
 higher earnings
 lower probability of unemployment
The costs include foregone earnings while in school and out-ofpocket costs of education
Brighter individuals get more education because they are more
likely to see that the marginal benefits exceed the marginal costs.
Why we should all get a good
education…
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A company had
a going away
party for a lady
in their Little
Rock claim
office.
He told them to
write: "Best
Wishes
Suzanne" and
underneath that
write "We will
miss you".
Investment in Education
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What are the differences in earnings by
educational attainment?
Holding years of education constant, why
do earnings vary by
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occupation?
gender?
race?
Average wages, all workers over 25 –
2007
Doctorate
95,785
121,340
Professional Degree
Masters Degree
70,559
Avg Salary
59,365
Bachelor's Degree
HS
33,609
21,881
< HS
0
50,000
100,000
150,000
Data: Current Population Survey (CPS) 2008
http://pubdb3.census.gov/macro/032008/perinc/new03_001.htm
Median Earnings of Males and Females Ages 25–34
by Education Level, 1971–2002 (Constant 2002 Dollars)
Source: National Center for Education Statistics. (2004). The Condition of Education. (NCES 2004-077). U.S.
Department of Education.
Average Earnings in 1982 & 2002:
Males 25-34
Education
48,955
42,593
Bachelor's
35,552
37,921
Some College
29,647
34,147
HS
2002
1982
22,903
27,765
< HS
0
10,000 20,000 30,000 40,000 50,000 60,000
Data: National Center for Education Expenses
2002 $ / yr.
Earnings Differences by Education
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In 1982, the marginal benefits of investing in a
college education were (in real $):
$42,593 - $34,147 = $8,446 in additional earnings
each year of one’s work life.
In 2002, the marginal benefits of investing in a
college education were forecast to be (in real $):
$48,955 - $29,647 = $19,308 in additional
earnings each year of one’s work life.
The Return on Educational
Investments has Grown Over Time
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Earnings of BA/BS recipients have grown more than inflation
over the last 30+ years, with advanced degree holders capturing
the largest return
Earnings of high school graduates have lost ground relative to
inflation.
The typical bachelor’s degree recipient can expect to earn 73%
more over a 40 year working life than the typical high school
graduate (http://tsp.convio.net/site/PageServer?pagename=education_pays)
By the age of about 33, the typical college graduate has earned
enough to compensate for both paying full tuition and fee charges
at the average public four-year college and foregone earnings with
a high school degree
(http://tsp.convio.net/site/PageServer?pagename=education_pays)
What are the costs? (2009 #s)
Tuition & fees
for 2 semesters
Books
Foregone
Earnings
University of
Utah
$5,332
Stanford
University
$36,030
$1,800
$2,250
$29,647
$29,647
$36,779
$67,927
(2002 HS degree – men)
Total Costs
Cost-Benefit Assessment...
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Do the marginal benefits of education outweigh
the marginal costs at the University of Utah?
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Compute the present value of the annuity (PVA) for both
the marginal costs and marginal benefits and compare:
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For the costs, use n=5, FV=$36,779
For the benefits, use n=40, FV=$19,308
Marginal Costs:
PVA = $168,437
Marginal Benefits:
PVA = $446,300
Cost-Benefit Assessment...
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In this instance, the benefits are clearly greater than the
costs, but this may be an underestimate of the actual net
benefits… Why?
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May understate income growth more than college costs
because of the difference in the time horizon.
Does not factor in the value of the retirement benefits that
are likely to accrue because of a better job.
Does not factor in other fringe benefits that are typically
associated with a better job (e.g., health insurance,
disability insurance, child care subsidies).
Are Gains in Earnings and Related Financial Factors
the Only Benefits of a College Education?
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Other benefits that accrue to the individual or
household…
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greater efficiency in household production activities
(e.g., shopping behavior, family finances, child
development)
greater non-pecuniary benefits of employment (e.g.,
occupations where you set your own hours, work at
home, do more challenging tasks, reduce health risks)
better relationships in general; especially better marriage
rltnshps
Are Gains in Earnings the Only Benefits of
a College Education?
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Other benefits that accrue to society (i.e., social
benefits)
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more informed voters and more likely to participate in
the political process
additional earnings raise the tax base
less likely to engage in illegal activities
Reported Voting Rates by Age and Education Level,
2000
Source: U.S. Census Bureau. (2002). Voting and Registration in the Election
of November 2000.
Incarceration Rates by Education Level, 1997
Source: Harlow, C.W. (2003). Education and Correctional Populations.
Bureau of Justice Statistics, Department of Justice. NCJ195670.
If education is such a good investment,
why doesn’t everyone get a Ph.D.?
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Situations where the opportunity costs are
exceptionally high.
Situations where the out-of-pocket costs are
prohibitively high (e.g., low-income households).
Situations where other, non-pecuniary costs are
quite high (e.g., time needed to study).
Situations where the marginal benefits are
exceptionally low.
Mean Annual Earnings by Occupation 2006
$39,948
Sales
Food Prep
Healthcare Support
$17,634
$24,568
$55,759
$47,681
$39,496
$66,063
$72,117
$69,065
$59,193
$83,827
Healthcare
Education
Social Services
Architecture/Engineering
Computer
Financial Analysts
Business
Management
$0
$20,000
$40,000
Data: BLS
http://www.bls.gov/ncs/ocs/sp/ncbl0910.pdf
$60,000
$80,000
$100,000
Education pays ... Data are 2007 annual averages for persons age 25 and over.
Earnings are for full-time wage and salary workers.
Unemployment Rate Educational Level
Median Weekly
Earnings
1.4%
Doctoral Degree
$1,497
1.3%
Professional Degree $1,427
1.8%
Master’s degree
$1,165
2.2%
Bachelor’s degree
$987
3%
Associate degree
$740
3.8%
Some college, no
degree
$683
4.4%
High-school
graduate
$604
7.1%
Less than a high
school diploma
$428
Source: Bureau of Labor Statistics,
Current Population Survey.
http://www.bls.gov/emp/emptab7.htm
Why do earnings vary by occupation,
controlling for years of education?
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Cost-Benefit Differentials
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Recognition of differential educational investment (e.g.,
acquiring economic knowledge may be easier than
acquiring chemistry knowledge)
Recognition that some occupations confer enjoyment
above and beyond salary while others do not.
Recognition that there may be risks to the employee
that one needs to compensate for (e.g., health
considerations
Recognition that some jobs require more hours of work
than others.
Recognition of differentials in on-the-job training.
On-the-job training...
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Two types…
(1) formal training (e.g., apprenticeship programs,
internships)
(2) informal training (e.g., “learning the ropes at a new
job”)
Like schooling, investment in training within a firm is undertaken
at a cost. But, who bears these costs?
Costs should be born by the entity that gets the return on the
investment. In most instances,
 firm gets a more productive employee
 individual has the potential for greater salary gains
So, who should pay??????
On-the-job training...
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Need to distinguish between two types of job training…
general training - develops skills of equal value both in the
organization that provided the training and elsewhere (e.g.,
investing in computer programming skills).
specific training - acquisition of skills that are of greatest
value to the current employer (e.g., learning how a specific
company has set up its accounting system).
Implications...
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Specific training skills do not easily transfer to another
employer and thus the current employer has some incentive
to underwrite the investment because s/he is guaranteed that
you will stay long enough for the firm to recoup its costs.
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Firms will only underwrite the cost of general training
investments if they can somehow guarantee that the
employee will stay long enough for the firm to recoup its
investment.
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Employers have an incentive to retain employees with
specific training as long as possible… hence, they will be the
last to be laid off and/or the last to be “encouraged” to retire.
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