Week3 - Human Capital

• what does Becker, 1964 state about the choice of education level


  most people think of education as an investment human capital as it raises earnings and improves health
• define human capital


  a set of skills/characteristics that increase workers productivity

  
  

  workers add to their stock of human capital throughout their lives, especially via job experience and education
• to what point do workers choose their level of human capital investments


  workers choose the level of HC investments that maximises the present value of lifetime earnings
• what do investments in human capital compare


  they compare present value of the future earnings and current costs
• define and give the formula for present value


  present value is a way of comparing current and future pound values

  
  

  PV of payment y pound next year is:

  
• at what point do agents choose to go to university


  if the net present value of earnings with a degree is higher than with high school
• what are the costs of going to university

  direct cost, H

  opportunity cost
• draw the age-earnings profile

  
• algebraically, show when it is optimal to go university

  if PVhe > PVhs

  
• what does 'r' represent

  its the discount rate

  
  

  someone with a high r discounts the future heavily and is less likely to invest in schooling since they are less future orientated

  
  

  r measures impatience
• what can be said about heterogeneity within human capital


  heterogeneity exists as expected returns and current costs vary across students, otherwise we would have corner solutions where nobody goes to uni or everyone does

  
  

  discount rates and opportunity costs also vary
• draw and explain the wage-schooling locus


  individuals calculate the PV for each level of education and choose the amount of schooling that maximises PV future earnings

  
  

  another way of thinking about this is when salary employers are willing to pay for each level of education

  
  

  slope: ∆w/∆s

  
• define and give the characteristics of MRR

  Marginal Rate of Return to Schooling - percentage change from 1 more year of schooling

  
  

  MRR is decreasing
• draw and explain the MRR schedule

  
• on the MRR schedule, what is the optimal stopping rule

  MRR = r

  
• draw and explain the MRR schedule and wage-schooling close when workers have different abilities


  - individuals vary in underlying productivity and then earnings differentials across workers do not provide a valid estimate of the rate of return to schooling - RoR is usually overestimated

  
• why should we consider ability bias and how it doesn't provide a valid estimate of RoR


  - if the government is trying to estimate the effect of increasing participation at uni it would not be optimal to use the difference between current HE degree holders earnings and HS diploma earners
• define ability bias


  the extent to which unobserved ability differences exists affects estimates on returns to schooling, since the ability different may be the true source of the wage differential
• give and explain the formula for estimating returns to education


  also known as the Mincerian Wage Regression

  
  

  Y = wage

  
  

  alpha = positive constant

  
  

  pho = partly reflects human capital and partly ability - biased estimator (usually overestimates the effect of education)

  
  

  S = years or level of schooling

  
  

  gammaX = other characteristics i.e. age, sex etc

  
  

  error = ability forms part of it
• what are the effects of the assumption that schooling is exogenous


  the error term is uncorrelated with the variables and has a mean of zero
• if using OLS, what can the estimate coefficient pho be interpreted as

  the rate of return to schooling
• why might the observation associated between wages and schooling be misleading


  it partly reflects omitted factors that are related to both variables such as unobserved ability

  
  

  this is omitted variable bias and shows that schooling is actually endogenous
• what are the effects of measurement error

  if years of schooling are measured with error there is also a downward bias (attenuation)
• what is the effect of both measurement error and omitted variable bias


  they work in opposite direction so some argue that the cancel out more or less
• refer to powerpoint for case studies