Unformatted text preview: Max Haubold
E-fztducation in the labor Market: Some Stylized facts
- Eollege earns about 3 times as much at high school
5-2: Present Value
Present Value- compare dollar amount spent and received in different time periods.
- It: rate of interest or rate of discount
ES: The Schooling Model
. Assume workers acquire the education level that maximizes the present value of lifetime earnings.
- Age-Earnings profile~ wage path overthe life cycle
ﬂpportunity cost- the cost of not pursuing the best alternative
- Wage-schooling locus- gives the salary that employers are willing to pay a particular worker for every level of schooling
- Wage‘schooling locus— l..l.lpvvard sloping 2. Tells how much aworker's earnings would increase if he were to obtain one more year of schooling 3. [loncave
Marginal rate of return to schooling- percentage change in earnings resulting from one more year of school — percentage increase in earnings per dollar spent in education investments.
- Milli graphs y=rate of discount x= years of schooling-> declining. when r=lcflllt stop, 3* V ‘
B-Ii: Education and Earnings
— Not everyone has the same wage-schooling locus
E-E: Estimating the Rate of Return to Schooling
. [og w : bs + other variables
Wattage,- s=number of schooling years; b= percent wage differential between two workers who differ by one year of schooling (rate of return to schooling)
- Approx rate of return to schooling = 7.5% ’
E-E: Policy Application: School Construction in Indonesia
— INPRES. Indonesia. 2 schools per lllllt]. LE 96 GDP. 'I'Ell] million S
- Was effective. 27%. possibly rate of return to schooling itl‘lé
5-7: Policy Application: School Euality and Earnings ‘
llse Maimooides’s rule 25 kids per class. max size 4|] no matter what. Shifts class size without affecting any other variahles
578: Do workers maximize lifetime earnings?r '
Seiection bias- the fact that workers self-select themselves into jobs for which they are best suited
E-H: Schooling as a signal
- Sheepskin levels of educational attainment- degrees
Asymmetric Information- one ofthe parties in the transaction knows more about the terms ofthe contract.
4 Signal- credible information to allocate a worker into a productivity group
E-ll]: Pest School Human Eapital Investments. .
Age earnings profile- I. Highly educated workers earn more than less educated workers 2. Earnings rise over time, but at a decreasing rate 3. The age-earnings profiles of different education groups diverge over time (earnings increase faster for more educated workers)
5-“: [In the Job Training
TE! +(TL’2/l+rl= Will]? +[VMF2/l+rl
- Eompetitive firms only provide general training if they don't incur any costs
E-l2: [In the Job Training and Age-Ea rnings profile
- Efficiency tlnits- standardized units of human capital
lvfincer Earnings Function; log w: as + bt-ct“2 + other variables
v T"? = concavity of the age-earnings profile
- A: rate of return to schooling
Provides a reasonably accurate description of age-earnings profiles not only in the US, but elsewhere
fi-l3: Policy Application: Evaluating Government Training Programs
MSW? doesn’t get rid of selection bias Summary
- A dollar received today does not have the same value as a dollar received tomorrow. The present value of a future income receipt gives the value ofthat amount in terms oftoday's doitars. The wage-schooling locus gives the salary that a worker earns if he or she completes a particular level of schooling.
- Workers choose the point on the wage schooling locus that maximizes the present value oflifetime earnings. In particular, workers quit school when the marginal rate of return to schooling
equals the rate of discount.
- When workers differ only in their discount rates. the rate of return to schooling can be estimated by comparing the earnings of different workers. When workers differ in their innate abilities.
the wage differential among workers does not measure the rate of return to schooling because the wage gap also depends on the unobserved ability differential. Workers sort themselves into those occupations for which they are best suited. This self-selection implies that we cannot test the hypothesisthatworkers choose the schooling level that
maximizes the present value of lifetime earnings by comparing the earnings of different workers. In the United States. the rate of return to schooling was arooodEl percent in the lElEIﬂs
- Schooling can play a signaling rate in the labor market, indicating to employers that the worker carrying the certificate or diploma is a highly productive worker. The signaling value of education
can help firms differentiate highly productive workers from less productive workers.
- lf education plays only a signaling role, workers with more schooling earn more not because education increases productivity, but because education signals a worker's innate ability. The observed ageaearnings profile is upward sloping and concave. Earnings increase over the life cycle. but at a decreasing rate.
- General training is valuable in all firms. Specific training is valuable only in the firm that provides the training. Workers par for and collect the returns from general training. Workers and firms
share both the costs and the returns of specific training. The optimal timing of human capital investments over the life cycle implies that the age-earnings profile is upward sloping and concave. ...
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- Fall '08