Lecture 16 - Lecture Lecture16 HumanCapitalIII Looseends...

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cture 16 Lecture 16 Human Capital III ose ends Loose ends
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oadmap Roadmap easons for returns to education 1. Reasons for returns to education 2. Spence signaling model 3. Evidence on signaling 4. Social vs. private returns to ducation education
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hat we know What we know nce: Since: (1) W=MP L in a competitive market and (2) workers with more education earn more on average…. we can infer that more educated workers are also more productive workers. hat we don’t know for sure is why What we don t know for sure is why.
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Why do you think people with more education make more money? ey know more so they are more productive They know more, so they are more productive workers. ey have more skills so they are able to They have more skills so they are able to “weather the storm” better than those with ss education less education. Signaling – education is a signal of high ability or motivation. Education is just a proxy for ability or motivation.
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aditional Human Capital Story Traditional Human Capital Story =F(K H) : output Y is a function of physical YF (K,H) : output Y is a function of physical capital K and human capital H. F(K L : output Y is a function of physical Y=F(K,L×S) : output Y is a function of physical capital K and human capital L×S. (S is schooling) a perfectly competitive world W=MP nd (if In a perfectly competitive world, W=MP L , and (if you remember calculus) =MP S W=MP L = Δ Y/ Δ L= S×( Δ F/ Δ L). In words, better educated workers are paid more because education makes them more productive , and they are paid their marginal product.
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hy does it matter why? Why does it matter why? ppose we want to increase economic Suppose we want to increase economic growth. Is increasing education levels ecessarily a going to work? Why or why not? necessarily a going to work? Why or why not? If education is juts a signal, or is just a proxy for ability then increasing education will not increase growth.
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ternational Evidence International Evidence
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Are there reasons to doubt this international evidence? everse causality Reverse causality. Some other factor could lead to more education and higher income levels. What would you do to find the causal effect?
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ence Signaling Model Spence Signaling Model ppose employers cannot tell who is a good Suppose employers cannot tell who is a good worker and who is a bad worker, but they can observe how much education a person has. What do you think employers would do and
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Lecture 16 - Lecture Lecture16 HumanCapitalIII Looseends...

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