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Ch. 9. Investments in Human Capital: Education and Training • What are the costs and benefits of obtaining a college degree? • What factors affect the number of people attending college? • Why do women receive less training than men and why has the gap shrunk over time? • Why do men and women pursue different types of college degrees? The “Returns” to Education Joint Economic Committee Report to Congress (2000) • Rate of return on an additional year of schooling is quite substantial. In 1990, this rate averaged almost 10 percent per annum. • In 1998, the median income of bachelor degree recipients was $46,285, nearly $20,000 higher than the median income for workers with only high school diplomas. • Increased educational attainment increases the probability that an individual will remain in the labor force. – Among male workers in their 30’s, • 2.4 percent of college graduates were out of the labor force, • 7.9 percent for high school graduates. The “Returns” to Education Joint Economic Committee Report to Congress (2000) • Education and training associated with fewer involuntary job changes. • The return on a college diploma varies from one concentration area to another. – recent median starting salary of a college graduate with a degree in computer science or engineering was $32,802 – 36% percent higher than the median starting salary of all college graduates. – Recent evidence • Positive relationship between increased education and good health. The “Returns” to Education • “Public” Returns – Human capital formation has a positive effect on economic growth. • If education levels had stagnated at 1959 levels, and everything else had remained the same, GDP in 1997 would be 82.6 percent of its current level in real terms. – More education is associated with reduced dependence on income transfers. – Where the population is better educated there are, on average, fewer crimes. MODEL OF COLLEGE ATTENDANCE. If PV(Benefits) > PV(costs) ==> attend college. • Benefits: – increase in earnings – utility from different type of work. • Costs – direct costs (tuition, books, etc.) – foregone earnings Estimating the return to education Suppose a person may attend college from ages 19-22. Ct=earnings at age t with college degree Ht=earnings at age t with high school degree Dt=Ct-Ht Retirement at age R T = annual tuition, fees. PV(Costs) = ( H19 + T) + (H20+T)/(1+r) + (H21+T)/(1+r)2 + (H22+T)/(1+r)3 PV(Benefits) = D23/(1+r)4 + …… DR/(1+r)(R-19) NPV = PV(Benefits) – PV(Costs) Estimating the return to education NPV=PV(Benefits)-PV(costs) NPV internal rate of return discount rate •Why does NPV curve slope down? •If discount rate < IRR NPV>0 education is a “good” investment. Factors influencing rate of return • wage premium for college graduates • direct costs of attending college – Tuition – scholarships/financial aid • foregone earnings – state of the economy • Individual preferences/abilities: – discount rates – Ability – preferences regarding types of work. Factors influencing rate of return • Age • Expected period of time in labor force: – Women, childbearing, and career interruptions. – Rising life expectancy • Taxation – Progressivity matters Difficulties with measuring rate of return • Upward bias – higher ability may be more likely to go to college. • Downward bias – most studies exclude value of benefits which tend to rise with education. • Uncertain bias – most studies exclude “nonpecuniary” differences in jobs • Risk, physical demands, etc. • Dealing with the bias – Statistical methods – Twins studies Human Capital or Signaling? • Human capital – education improves productivity of workers. • Signaling – education doesn’t improve productivity – Provides a signal to employers whether workers are capable of learning in future. Male-Female Differences in College Degree Choices Factors determining degree choice Male-Female Differences in College Degree Choices • Explanations for gender differences – – – – Employer discrimination Employee tastes Penalties for career interruptions Socialization in youth