Ch. 7: The Theory of Human Capital Analysis of importance of education and training. Human capital: embodied in worker; invest in HK just like invest in other types of K. Why invest in HK? Because workers expect a return in enhanced earnings.

Pattern of Education and Earnings for Men See Figure 7.1 Shows age-earnings profiles for different levels of education. Specific features: 1. 2. 3.

Education as an Investment Gary Becker: Is education a good investment? Compare costs to benefits across the entire lifetime. Costs include opportunity costs. Overall:

HK Investment Decision Compare two “life strategies”: 1) Finish high school and start working FT at age 18 to age 65. 2) After h.s., go to college for four years, then work FT from age 22 to age 65. * direct costs: * opportunity costs:

The Two Strategies Compare lifetime earnings for HS versus C: $ earnings: HS: C: BUT need to know these two figures in present value terms. Present value: more distant in time the $ is received, the lower its current/present value. FV = $106; PV = $100. FV must be discounted to get PV.

Implications of HK Theory 1.  college costs should lead to  college attendance due to  net return. (yes observed in real world) 2. Most students young. (yes) 3. Lower enrollment rates for those not expecting to work continuously (yes). 4. Individual with more education has higher earnings in peak years (yes).

Formal Model of HK Investment Developed by Becker; has D for HK curve and S of investable funds curve. These S and D curves differ across individuals; implies existence of earnings differentials too. Why differences in S? Due to differences in opportunity:

More on Formal Model Why differences in D? Policy solutions: 1. 2. 3. Policy solutions: Extension to HK Theory: HK as signal (screening device).

On-the-Job Training (OJT) OJT like any other HK investment but now some of OJT investment costs (and benefits) will be shared between worker and employer. General OJT: Specific OJT:

Who Pays for Training? General OJT: worker can use this training to  productivity at many firms so employer won’t pay; worker must pay with reduced wages during training but then benefits with increased wage after training. Specific OJT: the training is specific to this firm; worker can’t “take it with him” so firm willing to pay for it, but then reaps some of the benefits of the increased productivity post-training.

4 Implications of Investment in OJT 1. For workers w/specific training: 2. Wmin might  firm’s willingness to provide training since cannot w during training. 3. Specific OJT: 4. Shape of age-earnings profile:

Intermittent Work and Women’s Earnings See Figure 7.10: shows age/earnings profiles for men and women (college grads and just HS). Two things to note: 1) 2)

Why Differences in Age/Earnings Profiles? Three reasons: 1. 2. 3. Why intermittent work causes flatter age/earnings profiles? 1. Less OJT investment (due to less chance of return to investment). 2. Less access to occupations with much specific OJT (so women stuck in secondary sector). 3) HK depreciates during time out of LF  difficulty of mid-career re-entry