chapter 9: the economics of education. overview robust relationship between education and earnings....
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Chapter 9: The Economics of Education
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Overview
• robust relationship between education and earnings.
• Why?• What determines the level of education selected
by an individual?
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Human capital model
• human capital - an individual’s productive capacity.
• human capital may be increased by investments in:– education,
– training, and
– health care.
• individuals with more human capital receive higher pay (since they are more productive).
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Optimal investment in education
• invest in additional education only if PV(benefits) is at least as large as PV (costs).
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Costs of college education
• direct costs (tuition, books, supplies),• forgone earnings (opportunity cost of time), and• psychic costs.
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Benefits of college education
• higher expected earnings,• more pleasant jobs,• lower expected unemployment rates, and• psychic benefits.
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Optimal investment in education
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Choice between high school and college degree
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Factors influencing human capital investment
• interest rates,• the age of the individual,• the costs of education, and• the wage differential between high school and
college graduates.
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Age-earnings profile
• Age-earnings profiles are concave (the rate of increase in earnings decreases as individuals age).
• This is caused by:– a decline in human capital investment as individuals
age, and
– sometimes partly due to declines in physical strength as individuals become older.
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Gender and age-earnings profiles
• historically, women have had shorter expected worklives.
• lower incentives for investment in education.• increases in female educational attainment are
caused by (and are a cause of) increased expected worklives for women.
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Is a college education a good investment?
• estimated rate of return: 5-12%• some evidence of an increase in recent years.
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Possible biases in estimates of the rate of return to education
• ability bias (an upward bias),• nonpecuniary benefits (downward bias), and• selectivity bias.
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Is there a socially optimal level of investment in college education?
• externalities and subsidies.• signaling model.
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Cobweb model
• lagged supply response.• applicable in labor markets with high educational
and/or training requirements.
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Cobweb model (cont.)
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Cobweb model (cont.)
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Cobweb model (cont.)
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Cobweb model (cont.)
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Cobweb model (cont.)
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Cobweb model (cont.)
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Cobweb model (cont.)