Human Capital

Mechanisms vs. omitted factors

*FIGURE OUT*

Throughout worker's life...

-add to their stock of human capital (via education/job experience) -increases MPE and improves wage -skills can lead to better employment opportunities and higher income

Determinants of discount rates

-borrowing costs -mistrust of future (crime) -patience (learned from parents or school) (can difference in discount rates help explain B/W differences in education?

Natural Experiment- 1918 Influenza Pandemic

-*question*: how much does early-life health affect long-term earnings potential? -*strategy*: use 1918 Influenza epidemic as natural experiment (use *single differences model* -*assumptions*: people born before epidemic or well after epidemic are similar to treated cohort along other important dimensions except schooling -*results*: large impacts on long-term outcomes

Marginal Rate of Return (MRR)

-MRR: the % increase in earnings resulting from *one* additional year of school -worker maximizes the present value of lifetime earnings by going to school until the *MRR to schooling = r (discount rate)* -SEE CARD

Present Value Equation

-PV = y / (1 + r)^t -r = per period discount -y = future value -t = number of time periods

K = f(S, e(1), e(2), ..., e(n))

-S = years of schooling -e = all other things that make people more productive (HS quality) -K = human capital that increases productivity and, in turn, wages

Discount Rates

-consumption *today* is worth more than equivalent consumption *tomorrow* -important for labor models since college pays out more in future -PV allows comparison of dollar amounts spent and received in different time periods

Discounting the Future

-higher discount rate = higher impatience -higher discount rate = future is worth relatively less

Human Capital Investments

-if W(col) - cost(col) > W(hs) for *everyone* -increase in supply would drive down W(col) until W(col) - cost(col) = W(hs) -to help explain differences in schooling across populations, it's possible that these costs/wages differ for different people -*intuition of model*

Production of Human Capital

-in a competitive labor market, workers are paid the value of the work they produce -so, return to schooling is determined by the increase in the worker's marginal product from more schooling -K = f(S, e(1), e(2), ..., e(n))

Parental Investments

-in general, we think of education as the individual's decision -however, parents are realistically making much of the decisions -how might the parental decision making process be similar to the individual? -*invest more in high ability* -may differ across families (either invest more/less in low ability kids) -parent investments may *mitigate or reinforce* differences across siblings -depends on whether parents care more about *equality* or *efficiency*

Diminishing Marginal Returns

-learn less necessary things as you go through education (reading --> statistics) -how valuable is extra schooling if you've got no schooling, primary schooling, or a high school education? -thus, we would expect marginal rates of return to *diminish* with each additional year of schooling

Prenatal care

-positive bias between prenatal care and income later in life -omitted factor: parents' education -positive bias -policy makers will *overvalue* prenatal care

Why might the rates of return on college investments vary across race?

-social networks -worse schools -parental background -health -discrimination

Intuition of Model (human capital)

-think about education/human capital as an investment with a rate of return that varies across individuals

Predicting human capital

-your early-life capital (or initial endowment) can predict total human capital investments over life course

Investment Decision

SEE CARD