CECN640-NOTES_for_chapter_9-Human_Capital_Theory - CECN640:...

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CECN640: NOTES Related to Human Theory (1) Highlights 1. The essence of the human capital theory is that workers and firms make investments in human resources in the form of education and training so as to raise productivity and earnings. The theory operates in a cost-benefit framework, and it is crucial to consider opportunity costs of time spent while in training. As the old saying goes, “When you are leaning, you are not earning.” 2. One of the central tenets of human capital theory is that wage premiums are paid not for the innate ability of a worker, but rather as payment to the worker for having invested in certain type of education or training program. 3. The typical visual or diagrammatic explanation employed is the so-called age- earnings profiles (Figure 9.1), in which age is the variable on the horizontal axis, and earnings is the variable on the vertical axis. For most individuals, these age-earnings profiles have a positive slope (reflecting positive wage returns to labour market experience ) and a concave shape (reflecting diminishing marginal returns to experience ). Ceteris Paribus (or other things being equal) , the higher (lower) the level of human capital, the higher (lower) the placement of the age-earnings profile. 4. According to human capital theory, the individual worker has some choice over his/her human capital investment decision and will choose the quantity of education that maximizes the net present value of lifetime earnings. This optimal choice occurs where the marginal cost of investing in human capital (in discounted present value terms) is equal to the marginal benefit of investing in human capital (in discounted present value terms). The primary implication here is that we expect for human capital decisions to be made early in one’s lifetime. 5. The
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This note was uploaded on 10/12/2011 for the course ECON 640 taught by Professor Brenan during the Spring '11 term at Ryerson.

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CECN640-NOTES_for_chapter_9-Human_Capital_Theory - CECN640:...

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