ECo2117 Chapter 8 Human Capital

Private benefits and Costs of education

-Private benefits of education: individual's higher wage employment opportunities -Private costs of education: individual's direct and indirect costs of education We can think of it as if someone got a masters vs just bachelors, the value of a masters will be way higher pay wise/likelihood of getting higher pay Optimal strategy: maximize the level of education possible

Child Labour Model Assumptions

1) Household of high incomes then the children would never work 2) Adult labour and child labour are substitutes, no child work is due to parents working enough

Pareto improvement

A situation in which one or more persons may be made better off without making anyone worse off.

Children Labour Equilibria

All families are better off when all refuse to send children to work, but there is a coordination problem • Good equilibrium in which no children work may be achievable through effective ban on all child labour • Good equilibrium is self-enforcing: wages are high enough such that no child works, but this means that there needs to be higher wages, and these firms would want to ban paying higher wages

Lorenz Curve for Education

Cumulative proportion of schooling vs cumulate proportion of population Education quality (if they have textbooks, good teachers, etc.) as the number of years of schooling

Child Labour Model Demand Curve

Diagonal line for demand

Investment in Education and Health Calculations

Gains: - E: Income with extra schooling - N: Income without extra schooling - I: Discount rate - T: the number of years The benefit formula= Sum of (ET-NC)/(1+i)^T We compare the net present value of going to additional schooling Costs: direct costs (tuition, etc.) and indirect costs (foregone earnings)

Child Labour Model Children working low adult unskilled labour wages

Once A is low enough then children will have children working At T all adults and children are working

Social benefits and costs of education

Social benefits of education: benefits of individual's education to the entire society, including benefits to the individual and to others Social costs of education: costs of individual's education to the entire society , including costs to the individual, and to others The optimal social strategy is to hit B years of schooling

Child Labour Model Supply Curve

The vertical line is the supply of unskilled adult labour (A) - If the wages are high (WH) then no children will have to work -If wages are low (WL) then children will have to work

Basic Human Capital Approach

indirect ability to increase wellbeing by increasing incomes.

Investment in Education and Health

• Human capital refers to human capacities that can raise productivity ex. health, education, etc • Health and education enhance well-being • Health and education are complementary • Human capital investment can lead to higher future incomes • Human capital investment: future income gains are compared to the cost of investment • Gains: higher income from education , Costs: direct costs (tuition, etc.) and indirect costs (foregone earnings)

The Child Labour Model

• Widespread problem, results to poor health of child workers, work instead of attending school, and hazardous work • Child labour model -Coordination failure - 2 possible equilibria: E1) good (no child labour) E2) bad (child labour), -All families are better off when all refuse to send children to work, but there is a coordination problem - Good equilibrium in which no children work may be achievable through effective ban on all child labour -Good equilibrium is self-enforcing: wages are high enough such that no child works