human capital

Who was Adam Smith?

(1723-1790) Adam Smith was a professor of moral philosophy at Glasgow. He authored "Wealth of Nations", the founding book of economics. Without math or stats/econometrics, he developed the basic principles of economics, especially microeconomics. He coined the term "Invisible hand" which is the unseen force that guides the free market. While he advocated for free markets, he recognized the role of government in correcting efficiency problems caused by public goods, externalities, and monopolies.

Are enclaves a benefit or a hindrance?

-Have an easier time learning how to navigate things due to the support network + access to ethnic goods -Have slower progress of learning the language of the country, and assimilating into the destination labor market. There are benefits when they initially arrive but as time passes it actually hinders them

Allocative efficiency and worker efficiency

Allocative efficiency refers to having decision-making skills and being able to choose what is the most optimal decision in each scenario. Worker efficiency refers to carrying out those decisions with the actual job. allocative efficiency is often a benefit of higher education

Native-born children of immigrants

As native-born children of the destination country, they have skills acquired in the destination country. They also have some of the favorable characteristics from their parents. These characteristics diminish from generation to generation. There are consequences of discrimination against immigrants and their children, which could lower their earnings potential. However, when we look at the data of us-born children of immigrants, they earn 5-10% more than children whose parents were born in the US. The favorable characteristics are stronger than the discrimination effects.

Motives for Migration:

Economic (Permanent or temporary) - looking for opportunities they aren't finding in their home country Refugee - need to escape where they currently live Family - spouses, older members, children, want to reunite their family ideology

Primary criteria for rationing immigration visas (examples):

Economic - canada, australia, new zealand These countries will ask "what do you contribute to our economy? Do you have skills that are in demand?" Family reunification - united states These countries will ask "To whom are you related? Do you have close relatives here?" Refugee - sweden They have skill categories and for family, but if you have neither the best way to enter is being a refugee Diaspora (ethnic) reunification - israel, japan, germany Closed door policy in japan, have to be japanese to get in

What is an experience earnings profile?

Experience earnings profile is a graph, with years on the job on the x axis and wage rate on the y axis. The curve on this graph shows the changes in wage rate as time passes and human capital is acquired. The steeper the curve, the more human capital is acquired.

Firm-specific and general training

Firm-specific training is when the on-the-job training is only applicable to that specific job, while general on-the-job training is applicable to many other jobs. Some jobs only have specific training and others have only general training, but most jobs have a combination of both.

Why are investments in human capital made by the young? (with exception of health capital)

For the same reasons experience earnings profiles concave down, and also because people go to school/migrate when they are younger if it is with the human capital intent and not the consumption intent since the return on investment in human capital is much higher when you're younger.

"internal rate of return" rule and "net present value" rule

If the internal rate of return rule applies, the person would choose the investment with a higher internal rate of return. If the net present value rule applies, the person would choose the investment with a higher net present value, which is seen as the wealth maximizing option.

Why do immigrant and ethnic enclaves form?

Immigrants have the tendency to live with other immigrants that are from the same country of origin Why? Bc Information and support-networks = jobs, housing, social contacts, marriage markets → need people to learn from when coming to this country that went through the same experience that you did Ethnic Goods - goods and services consumed by members of a group, generally not consumed by those not in the group. The cost of ethnic goods decreases with the larger size of the group (economies of scale). Having access to a religious school if you want to pass it down to your kids, same with language

What is meant by "Human Capital"?

In order for something to be considered human capital, it has to have three characteristics. It has to be productive (as is sunlight), created at a sacrifice (cost) to someone else, and embodied in a person and cannot be separated from a person. If all three characteristics are not covered, it cannot be considered human capital. Some examples of human capital are schooling, on-the-job training, language, and migration.

Mutually exclusive vs. independent investments

Independent investments refer to investments that can be made together. If there are two investments that can be made and both have a positive internal rate of return or net present value, the optimal decision is to make both investments. A mutually exclusive investment means that only one investment can be made and not the other. If two investments are mutually exclusive, the investment with the higher net present value would be the investment that is made.

Country specific vs. internationally transferable skills - relevance for economic adjustment of immigrants

Migrants are disproportionately high ability people from the origin population, so migrants will have a greater average ability compared to the people in the destination. If a migrant's skills are not highly transferable from origin to destination, then the earnings in the destination are going to be affected (lower), and therefore migrants have to make investments to increase the transferability of those skills before being able to get a license in the destination country. Until then, the wages will be low.

U.S. + Immigration Policy

The U.S. is currently debating what it wants its immigration policy to accomplish That is why the effort to reform immigration law have been unsuccessful since 1965, the reason is that there has not been any clear consensus of what the object of immigration policy should be Before 1965, since the 1920s, there was an extremely racist immigration policy in which those from northwestern Europe were favored, those from southern and eastern Europe were disfavored, those from Asia were essentially barred In us at the time, the family reunification policy was to be in place, the existing flows of immigration would still be there Changed in the 1960s because us, australia, and canada, wanted to seeing international alliances specifically in Asia which they could not do if they had racist immigration policies in place 1905-1914 → immigrants were predominantly european - heavily southern and eastern, the annual number of immigrants were a million a year on average → peak amount of immigrants in US

The US government announces the official unemployment rate every month. How are the data obtained? How is the labor force defined by age limits? How is the unemployment rate defined

The data is obtained by a monthly current population survey, happening since 1947. This survey covers about 60,000 households conducted by the Census Bureau of Labor Statistics. Whoever is living in the household will be recorded in the survey. The labor force is defined by anyone who is 16+. Unemployed included people without a job in the last week but searched for a job within the past four weeks and people on a short term job layoff. The unemployment rate is defined by the number of unemployed people divided by the labor force.

Why is there "so little" migration given large wage differentials?

The economic cost of moving is considered an investment, if the cost of moving has a high initial cost, the cost of moving might exceed the current wage. The cost of moving might exceed the net present value of expected returns after moving. If the IRR of the move is greater than the IRR at the current wage, then moving is a good investment. There are other factors to consider, like language barriers, religious sites not being as accessible, culture not being as accessible, etc.

Why do graduates have a higher rate of return than dropouts?

There are three reasons for this. First is "lumpiness" of investment: you get a bigger bang for your buck when you have all these skills you can combine together rather than a few separate ones. Dropouts have some separate skills but people with the whole degree have learned to combine all of their skills into one. Second is screening or sheepskin hypothesis: the educational aspect isn't what is increasing your human capital, but it is having the credentials/diploma to show your education that does. Last is the reassessment of internal rate of return: graduates naturally have a higher rate of return

What are Adam Smith's Principles on Why Wages Differ?

The first set of reasons stem from inequalities arising from the nature of employment: "Agreeableness or disagreeableness" of the job → have to pay more if you want someone to do an unpleasant job "Easiness and cheapness or difficulty and expense of learning the job" → easy to learn means it won't demand much of a wage premium, but if it takes a long time to learn, in order to conduce people to make that investment you have to pay them more "Constancy or inconstancy of employment" → have to pay more during inconstant jobs to incentivize them to choose those jobs vs. a constant job "Small or great trust reposed in those in the job" → need to pay people more if great trust is needed in order to incentivize them to be honest Probability of success → lower probability of success = need to command higher wages in order to incentivize them The second set of reasons stem from inequalities arising from other (non-equalizing) factors Restrictions on mobility (geographic or occupational/job mobility(need licenses for specific jobs)) → Smith refers to these restrictions as "Absence of "perfect liberty" Monopolies. Limited Information. Disequilibrium differentials. Arising from moving from one equilibrium to another equilibrium

Regarding migration, why is it said that "the pull is stronger than the push"?

The pull refers to when there are better opportunities in the destination, while the push refers to deteriorating opportunities in the country of origin. More often than not the IRR of moving is less than the IRR of staying. Pushes tend to typically occur if the wage differential is drastic or other factors (such as life-threatening problems) are considered. Also, discount rates can increase. For example, the housing crisis caused the discount rate to rise for individuals to the point where it is below IRR, making immigrating the less attractive option. During the great recession, it was noted that in various states that experienced substantial increases in unemployment, not all that many people left to go to states where job opportunities were better. This is because people may have thought that this is temporary and that they will be able to find opportunities again, therefore no need to make a move and because the homeowners' major asset is the equity value of their own house. The equity value decreased during the recession, therefore no one wanted to sell the house below value nor was anyone available to buy the house, which caused people to want to stay.

What determines a person's discount rate?

The value today that a person places on dollars received in the future is the discount rate. If a person is at the margin a borrower, the discount rate is the rate of interest paid when borrowing funds. If a person is at the margin a lender, the discount rate is the rate of interest received when lending funds. The discount rate is lower the greater the person's creditworthiness. It is lower for the wealthy compared to the poor. It is higher the greater the ratio of debt to equity. Discount rate < internal rate of return → positive → good investment Discount rate > internal rate of return → NPV is negative → not good investment Discount rate = internal rate of return → NPV is 0

Employers may provide training, but who finances on-the-job training?

The worker is financing because the worker is willing to since the skills learned here are applicable to many jobs. The firm is not financing on the job training because the firm finances some of this investment by paying the worker during training. If firm paid higher than its VMPL, there is no way that the firm could be assured that it would be able to recoup on its investment The more specific the training, the greater the share of the investment is done by the employer. Also, the greater the gap in the discount rate between the firm of the worker, assuming that firms always have a lower discount rate than workers, the more the financing will be done by the employer. Lastly, if there is the expectation that the relationship will continue for a long period of time, the more both sides will be willing to finance the investment. Purely general training is financed exclusively by the worker

Why do those with more schooling get paid more?

There are 3 reasons for this. One is the decision making ability (allocative efficiency) that humans learn in school. With this ability, people are able to make decisions and therefore can be put in higher positions. The second reason is because of the technical and managerial skills they have. Not only do people with schooling have technical skills, like med school or law school or technical school , but they also have managerial skills that allow them to know how to organize and manage a business for example. Lastly, people with more schooling are more efficient in learning new skills when on the job.

Why does human capital investment, such as schooling and on-the-job training, decrease with age?

There are four reasons for why human capital investment decreases with age: Finiteness of life - when we are younger, we are willing to make larger investments for on-the-job training because we expect to have many more years in the labor market. If we are close to retirement age, we are not going to be making investments in on-the-job training since I only have a few years left in the market. This has to do with how many more periods I will be receiving returns on my investment (in years). younger = larger period, larger NPV Rising opportunity cost of time - if our earnings have increased already after finishing a set of on-the-job training, our Wa has gone up, which lowers the wage differential, and the opportunity cost of time during making the investment. The internal rate of return on investment has gone down because our opportunity cost of the time of the investment has gone up. The earnings you would get if you didn't make the investment affects the wage differential and opportunity cost of time Do most profitable investments first - the incentive is to make the most profitable investments first and the smaller ones are made later The decreasing marginal product of investments - I can increase my stake in the investment

Comparing migrant earnings with natives:

Whether or not immigrants catch up to natives in wages depends on a variety of factors. For white European immigrants, given increased familiarity with the English language, their wages can come to parity with natives. Typically language is a defining characteristic of whether or not earnings catch up to natives, usually over a period of 10 to 15. Migrants have lower earnings at first because their skills are not readily transferable, but with the passage of time, they increase the transferability of their skills either by increasing the transferability of previously learned skills or by learning new skills. Migrants are also sacrificing higher wages when going through the process of increasing the transferability of their skills. The gap between migrants and natives narrows as time passes as they acquire skills. When immigrants start out, they are investing in destination-specific human capital, and the earnings gap narrows, and after some point in time, they might actually get higher earnings than natives. Studies in the US and Canada have shown that this is to be the case.

Why would investment in human capital vary with a) unmeasured dimensions of ability b) level of wealth c) earning potential before making the investment

a) higher level of ability means the person might be more efficient in learning and therefore will invest in more human capital b) a higher level of wealth means a person might be more willing to invest in human capital c) if you have a lower earnings potential before investment, you might be more willing to invest in human capital because you have the incentive to increase

how does the cyclical sensitivity of unemployment vary with the level and the firm specific content of on the job training?

as on the job training increases, cyclical sensitivity of unemployment also increases because it takes more human capital investment to train new hires up to the old level. the more firm specific training a worker has, the less sensitive they are to cyclical unemployment, as it would cost the firm more to retrain a replacement worker vs if a worker only has general on the job training, they are more likely to be fired in a recession because the firm has not invested in their HC and therefore easy to replace. jobs with low barriers to entry are more sensitive to cyclical unemployment