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 evidenceRecent 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 C t =earnings at age t with college degree H t =earnings at age t with high school degree D t =C t -H t Retirement at age R T = annual tuition, fees. PV(Costs) = ( H 19 + T) + (H 20 +T)/(1+r) + (H 21 +T)/(1+r) 2 + (H 22 +T)/(1+r) 3 PV(Benefits) = D 23 /(1+r) 4 + …… D R /(1+r) (R-19) NPV = PV(Benefits) – PV(Costs)

Estimating the return to education Why does NPV curve slope down? If discount rate 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.

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

Rising Returns to Education

Why have returns increased? institutions minimum wage unions increases in international trade skill biased technological change transition to service growth of computing NOT changes in relative supplies of college and high school graduates