Human Capital: INVESTMENTS (Before Midterm)

What would be the implications in the framework of this model of the proposal of Sanders/Clinton if college tuition was made free? (govt. picked up the costs)

(eliminate Cd from equation as you will no longer be having any out of pocket costs) *High ability = low ability *Application pool will be less in favor of high ability individuals *If there were costs (higher k), those with high ability would be more likely to invest (selectivity) and they aren't just randomly selected

Seasonal Unemployment

-->Seasonally adjusted data ex: There are less workers in January annually so you can't mistake this for a recession if it happens every year. *Doesn't follow individuals, but households (dwelling unit) - U.S. Census Bureau

Human capital learning method is the technique used today TYPES OF TRAINING

-General = useful everywhere (ex: school) -Job SPECIFIC training = useful only in job you acquire it and thus occupation specific -Migration - an immigrant has both specific and general training *University is general across firms/ industry -Industry specific of country specific (ex: law in France is general but country specific once you leave France) **General training is 100% financed by the worker while specific training requires more investment by employer (even though no training is 100% general or 100% specific

Labor Economics

-Studies the most important factor of production (Labor is 80% of GDP and thus most important) -Labor overlaps with how people/households make decisions (like where are they going to live?) -The 1960s was the change between "old" labor and modern

Wage = BMP is no specific training and only general (assuming in competitive market) BUT this is in an ideal world so different firms have different extents to firm specific training. How do you determine what affects this extent?

1) Extent to which training is firm specific vs. general --> greater investment sharing if greater extent specific to firm 2) Expectation that relationship will continue vs. high turnover --> if there is a higher expectation employee will quit, less finance from employer but if higher churning occurs, employee will invest less from fear of being replaced 3) Access to capital market for financing: discount rate = how much it costs to borrow money to finance investment, assuming firms have lower cost of borrowing than individuals.

Smith's 5 ways of compensating labor wage differentials

1) If wages could move freely across sectors, then you would have an efficient wage differential 2) Wages might not be equalized - restriction on access for certain occupations (i.e. guilds, unions, licenses) 3) Various occupations require licenses and justification for it is protecting consumers and for health and safety reasons (ex: barbers need a license) 4) Monopolies - government create monopolies which restrict the entry of firms, so blocks competition 5) Government subsidies - complained "church men" (aka ministers) were too many because they were compensated by the government. *Adam's Smith's take on the Economics of religion : If there is a religion supported by the government, you get an oversupply of clerics but empty churches. Thus, clerics will do whatever government wants regardless of what people want. That is why in the US, people go to church more than in Europe due to separation of church and state *You must also take into account the value of time: It's not too costly to spend time in a church but if you have society with a lot of money, they spend less time in religious activity because it gets expensive time wise. (There is money price and time price that you are giving up where you could be doing something else)

Uncertainty of Employment affected by...

1) Seasonality - Hourly wages differs depending on seasonality. (i.e. a construction project) 2) The business cycle - downturn in economic growth; less construction workers, but postal workers work year round

Human Capital

1) Skills embodied in a person 2) Has to be productive in labor market/household activists 3) Has to be created out of sacrifice (cost; not necessarily borne by student, could be by someone else)

Proposition on wages

1) difference in occupations: to get people to make sacrifices, they have to have assurance that they will make a certain amount after distributing capital 2) Trust- pay a higher wage for trust or reliability. If someone betrays trust, you want them to suffer a loss. If minimum wage is $10, and you pay $15, they get fired and face a $5 loss 3) Proposition of wages that equalize: probability of success (actor vs. consultant) - If risk neutral, then people would be neutral to time in a job with high probability of unemployment *Jobs with probabilities less than 1 will only attract workers if the wage they get is higher than the known job of the other worker. If they are risk neutral, than wage is predictable and a risky job would have to be the same

Constraints to Utility

1. Money Income (I = PxX + PyY) 2. Prices

Reasons for Unemployment

1. Students: I was not in labor force (school) and now looking for job; new entrants, young people 2. Homemaker/Disabled or Retired: Re-entrants: Had been working in past, dropped out for some time (typically women who raised children or older people who retired) 3. Those who quit and want a new job; voluntary 4. Temporary Job Lay off: Layoffs and discharges (fired): Layoffs > discharges when it comes to causes of unemployment due to changes in economic activity and firm activity

Would an industry finance GENERAL training?

An industry would NOT finance general training, because the worker can leave. They would only make the investment if it's firm specific and only if they can recoup the benefits. However, they can't force a worker to stay (can sue in certain cases)

Micro theories applied to people

Application will be statistical analysis --> HUMAN CAPITAL: production and has to be created via sacrifice because it requires resources to create it. *Human capital is embodied in a person- if you own a truck; you can sell it or rent

New Claims

Apply for unemployment compensation benefits but only the first month you are laid off! (also seasonally adjusted)

Substitution effect

Change in wage rate while level of satisfaction/utility constant (move away from leisure to work) ex: increase in pay - A higher wage rate but leisure more expensive because you give up more money MOVE ALONG IC, CHANGE IN SLOPE

Indifference Curve

Equally happy (get the same amount of utility) on the curve with the bundle. All of the various combos of x and y on the curve, you are indifferent with and they all provide you with the same level of utility. You are Indifferent between multiple bundles/combinations of (x,y) if they give you the same level of utility or equal happiness! *can rank bundles! and you can draw an infinite number of indifference curves between any two ICs *Indifference curves never intersect; otherwise violates transitivity! --> You want to be as far out as possible and get the highest level of utility

Hiring Errors

Errors increase --> more discharges among young people and thus, why there is higher youth unemployment

Human capital is COMPLEMENTARY

If I have more than one factor of production, it increases the productivity of the other factor of production ex: The grapefruits from California exported to the rest of the US are of higher quality than the grapefruit in California (if transportation costs are the same and we're talking of relative prices of high and low quality)

Investments independent vs. not independent of each other

If investment are independent of each other, then IRR > NPV --> Make investment If investments are NOT independent (one or other, but not both), IRR can give wrong answer, so use NPV rule!

Recession - Decline in economic activity --> lay off workers?

If the recession is deeper, the greater and longer the recession is expected to be --> greater layoff and the greater the likelihood the worker you laid off can be recalled. Also depends on if economic downturn is economy wide or firm specific. Will layoff if downturn is economy wide because can expect your worker to be unemployed everywhere. If more general training and the firm has less investment in the worker, they are more willing to lay the worker off *Women (or re-entrants) and less experienced/less training (newer/younger) workers are more likely to be laid off! THUS, greater layoff when greater recession, less investment, and for re-/new-entrants!

Cyclical Sensitivity

Lay offs occur in more cyclically sensitive industries. ex: construction, manufacturing (male-intensive); women show more cyclically sensitive but their overall unemployment rate is less cyclically sensitive than of men because of the industries they are in. Thus, males have greater cyclical sensitivity

Pure income effect

No change in wage rate, but higher budget line parallel to original (shift outward) ex: winning the lottery MOVE TO HIGHER IC

Corner Solution

No tangency, refers to the highest level of utility you can reach where you don't work or quit the labor force and your consumption of labor goes down while leisure rises! Where the highest level of utility you can reach is not where tangency of slopes of budget line and indifference curves are the same.

Unemployment compared to last 50 years

Now there is much more movement in and out of the labor force and why there's such high unemployment and higher lay off rates within industries

Old vs. Modern Labor

Old: trade union, labor laws, desiccative and institutional Modern: using micro theories to understand labor factor of production

Who qualifies as unemployed?

People of able body and age 16+ who are jobless, actively seeking work (in the past 4 weeks), and available to take a job. *No question of intensity of job search Labor force = Employed + Unemployed

Investment in Human Capital

Schooling, on the job training, health capital (getting enough sleep = costly/time), migration, information costs in investment = out of pocket expenditures (tuition, dorm fees) + opportunity cost (earnings foregone by making investment or the extra cost of investment)

The SOLUTION to the Dilemma

Share the costs/investment AND the benefits (but does not need to be an equal share)

Why do earnings and wages differ from their labor market activities?

Smith answers this question: depends on the agreeableness and disagreeableness of the job. Smith also assumed that less desirable jobs got paid more like the hang man because no one wanted to do it

Indifferent in making Investment in HC

So... Someone is indifferent about making the investment because same IC. The one who makes investment will work more but more MI, with less leisure but their utility will be the same. If IRR (internal rate of return) > DR (discount rate), then it would be a higher IC and greater level of utility. Thus, the implications are that those with higher and more human capital tend to work more in life and retire later in life. But, if IRR = DR, they are no different than the person who doesn't make the investment. Just because someone has more income does not mean they are at a higher level of utility.

Budget Line/Constraint, also Opportunity line

The bundles you can afford can be inside or on Budget line/Opportunity Line (Opportunity set = points on the inside) BUT a rational consumer will be at the highest level with the constraint of the opportunity line so the highest you can reach is tangent where slope of Indifference curve = slope of budget line If you want to consume more x, must consume less y Set of points = opportunity set (can be inside the budget line) Can ONLY go inside budget line unless change in Income, ceteris paribus (prices don't change); I --> I' in which I' > I *says nothing about utility Today's savings = future consumption!

Unemployment Rate

The number of unemployed as a percentage of the labor force (the sum of the employed and unemployed) UR = U/Labor Force aka U/(E+U)

Restrictions on Mobility of Labor

These restrictions cause impediments ex: corporations, guilds, unions restrictions on entry

The job training DILEMMA

Training is useful only in specific firms. The worker gets paid WA before, during and after training. If the worker gets paid WA before and WB after training, the firm can't recoup the benefits If the worker pays for own training, they pay assuming they will get paid WB but can get fired before reaching WB and loses investment. Thus, the worker has no incentive to finance training and neither does the firm so no firm specific training takes place.

Utility

U = f (X, Y) You can't measure utility, but still useful measure *You want to MAXimize utility subject to a budget constraint (I = PxX + PyY)

Transitive Relationship

U(A) > U(B) and U(B) > U(C) --> then, U(A) must be > U(C)

Positive Economics

Use theories and statistics to explore an issue, analysis of "what is" vs. normative economics which is based on naive judgements (is it good?) or what I think is desirable (values) *You can never prove a hypothesis, you can only find that your conclusion was consistent with your hypothesis

Total Effect

When your wage rate increases or pay goes up, there are two changes that take place: 1) Income effect: increased opt. set (increase in real income) 2) Substitution effect/also price effect: relative price of wages goes up and you have a new slope If you want to decompose to IE and SE, you draw a line that is tangent to the same IC of your original utility curve, but parallel to your new budget line, holding real income constant *depends on whether SE or IE dominates!

Injuries

Workers compensation insurance only if arise out of or in course of employment Minimum wage < cost of hiring worker

Objective

You can consume below your budget line or at an utility line below your budget line but that is not my objective. You would also prefer to be at a higher utility than your budget line allows but you can't reach it and that is why the best option is to stick to where IC = BL My objective is to MAXIMIZE utility and reach TANGENCY where the slope of your budget line is equal to the slope of your indifference curve.

Job training

You get more done and it's more efficient if you separate tasks on the job training - learning by doing (as a form of human capital)

Voluntary Exchange

You need cooperation if you are going to specialize and cooperation involves voluntary exchange. Voluntary exchange enhances wealth