Lecture 7 Human Capital vs. Signaling PDF

Lecture 7 Human Capital vs. Signaling PDF - Chapter 7 Human...

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1 Chapter 7: Human Capital Winter Quarter 2007 Sections: 7.0-7.6, 7.9-7.12
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2 Introduction So far we established Wages are the same for homogeneous workers Wages can differ because of compensating wage differentials Now: Wages differ because different workers have different levels of skill or HUMAN CAPITAL
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3 Human Capital Acquisition Human Capital consists of Inert Ability Education Training On-the-job Off-the-job
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4 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 ..2005 ..2003 ..2001 ..1999 ..1997 ..1995 ..1993 ..1991 ..1989 ..1987 ..1985 ..1983 ..1981 ..1979 ..1977 ..1975 ..1973 ..1971 ..1969 ..1967 ..1965 ..1962 ..1959 ..1952 ..1947 Less than HS More than HS High School some College 4 years college Educational Attainment 1945-2005
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5 Education: Overview
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6 Education and Labor Market Outcomes
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7 The Schooling Decision: A Simplified View Assume: 2 levels of schooling High School College When deciding how many years of schooling to get an individual will compare Lifetime Income if High School is chosen Lifetime Income if College is chosen = College Income minus College cost
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8 C The Schooling Decision: A Simplified View The individual decides to go to College if A < B-C Too simple because $1 now is not equal to $1 in the future 18 65 22 Age w COL w HS -H Dollars Goes to College Quits After High School 0 A B C
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9 Aside: Present Value Calculations Question: How much is $1 in one year worth now Consider having $1 now and investing it for one year at 10% After one year you have: How much are $1.1 in one year worth now? => exactly 1.1/(1+.1)=$1 ( ) 1 . 1 1 . 1 1 = +
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10 Present Value Calculations In General with interest rate i Present value of $1 in one year $ Present value of $1 in two years $ Present Value of $X in t years $ () i + 1 1 () 2 1 1 i + () t i X + 1 1
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11 Present Value of an Income Stream Assume: (constant) College Wage = w COL (constant) High School Wage = w HIGH Direct Annual Cost of College Attendance = H 40 year work-life Discount rate = r Direct Cost of College = H Calculate Present Value for each income stream for both scenarios
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12 Present Value of Income Stream if College is chosen () () () () () () () 40 6 5 4 3 2 1 1 1 1 1 1 1 r w r w r w r w r H r H r H H PV Col Col Col Col COL + + + + + + + + + + + + =
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13 Present Value of Income Stream if High School is chosen () () () () 40 3 2 1 1 1 1 r w r w r w r w w PV High High High High High HIGH + + + + + + + + + =
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14 The Schooling Decision The individual chooses to go to College if PV COL > PV HIGH The individual chooses to go to High School if PV COL < PV HIGH Note: The individuals decision depends on Wage Rate Discount Rate
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15 A Note on the Discount Rate So far we assumed that the individual
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This note was uploaded on 11/17/2009 for the course ECON 339 taught by Professor Habermalz during the Spring '09 term at Northwestern.

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Lecture 7 Human Capital vs. Signaling PDF - Chapter 7 Human...

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