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Unformatted text preview: Chapter 9: Human Capital Theory: Applications to Education and Training the essence of human capital theory is that investments are made in human resources so as to improve their productivity and therefore their earnings; costs are incurred in the expectation of these future benefits o Gary Becker, University of Chicago, is largely responsible for the development of human capital theory (during the 1960s) and in 1992 Becker became the first labour economist to receive the Nobel prize in economics an investment in human capital can be made either by people in themselves (for example, obtaining a university degree) or by employers in their employees (for example, on-the-job training) we begin by examining an investment in human capital in the form of additional education, such as obtaining a university degree o to what extent do the benefits of an investment in a university degree exceed the costs of that investment? o what is the rate of return on an investment in a university degree? to answers these questions, we apply the theory of investment in physical capital to investment in human capital while there are similarities between physical and human capital (for example, both depreciate through time), there are important differences: o unlike physical capital, human capital can not be bought and sold (you can not sell your B.A. to someone else) and there may be consumption benefits from an investment in human capital o it is much more difficult to diversify risk when investing in human capital (most graduates do not have a portfolio of degrees in different subjects, such as accounting, law, computer science, and economics) Determining the Internal Rate of Return on an Investment to determine the internal rate of return on an investment requires the comparison of future benefits (in future dollars) to current costs (in present dollars) discounting future dollars : to convert future dollars in year n into present dollars, future dollars must be discounted (divided) by (1 + r) n , where r is the interest rate o since annual interest (r) can be earned on a present dollar, the value of a present dollar next year is (1 + r), and the value in the following year is (1 + r) 2 ; the value of a present dollar n years later is (1 + r) n , the power of compound interest o the present value of a dollar received next year is 1/(1 + r); if you invest 1/(1 + r) this year at r, you will have one dollar next year; the present value of a dollar received (or paid) n years from now is 1/(1 + r)...
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This note was uploaded on 02/05/2011 for the course ECON 3240 taught by Professor Noordeh during the Winter '11 term at York University.
- Winter '11