1Universidade da Madeira1 Pedro Telhado Pereira May 2004 Part 2 Education and Wages

2Universidade da Madeira2 What to include in costs? Additional expenses that studying implies fees books photocopies Some aspects that been a student gives should be discounted. Example: free access to the internet that be used to other ends than studying.

3Universidade da Madeira3 No monetary benefits work in a nicer and healthier environment. longer and healthier life. influence of next generation education. ….

4Universidade da Madeira4 Signal Theory Let us assume that there are two kinds of workers more productive (+) less productive (-)

5Universidade da Madeira5 The firms will be able to pay higher wages to the more productive workers

6Universidade da Madeira6 Firms do not know who is more productive and who is less productive. All workers are going to say that they are more productive as in this way they will receive more.

7Universidade da Madeira7 More productive workers are interested in giving a signal that they are The education system is set in such a way that C(+) < C(-), making present value of investment in education positive for (+) and negative for (-). Educational system does the screening Try to explain why, from the social point of view, education looses its value.

8Universidade da Madeira8 We have two theories: Human Capital Theory – education increases productivity. Signalling (Screening) Theory – education does the screening as more productive individuals want to give a signal.

9Universidade da Madeira9 How do we test the theories? 1) comparing the return of self- employed with employees; 2) seeing if there is an increase of return for finishing the grade – sheepskin effects. 3) returns to education in the private and public sector. … we will talk about testing it latter.

10Universidade da Madeira10 So far we spoke of private returns to education but we could be interested in returns 1) For the State –Education costs paid by the State –Benefits – increase in taxes in the future, less spending in health and social problems...

11Universidade da Madeira11 2) Social –Total costs = Private + State + other institutions – Total benefits - Private, State, other individuals (externalities), future generations...

12Universidade da Madeira12 Training 1) General - This kind of training leads to na increase of productivity independently of the firm or the sector the worker is in. In this case workers have to paid by their own productivity; If a firm pays below the productivity the worker will quit This kind of training as to be paid by the individual or the State..

13Universidade da Madeira13 2) Specific training. Training that only increases the productivity in the firm. Worker has no incentive to pay for this training as he will loose his investment if he gets fired. The firm can pay for this training as latter it can pay the worker below his productivity.

14Universidade da Madeira14 Some notes: Age is important as the younger an individual does his education/training more years he has to receive the differential in wages. You should take in consideration the probability of unemployment as studies have shown that this probability decreases with education.

15Universidade da Madeira15 Should we consider hourly, monthly or yearly wages? Individuals with more education tend to work longer hours per day (as leisure is relatively more expensive) Bias due to ability of individuals – wages and schooling can depend on ability and therefore there will be a bias if we estimate the above equation by OLS. –Natural experiments Selectivity problems, specially in the female sample.