Chapter 9: The Economics of Education

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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 individuals 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.)