Returns to Human Capital Investments

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This figure presents the mean earnings for full-time, full-year male workers in 1999. Notice that the age earning profile is both higher and steeper for those with more education. It appears clear that individuals are getting a return on their human capital investments.

HC Returns in a Comp Dif Framework

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Since it is costly to get an education, workers will want to be compensated for jobs that require making that investment and firms will need to pay higher wages to attract those workers.

Human Capital Investment Decision

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Investing in college has both direct costs (monetaryand psychic) and costs from foregone earnings.

Make the investment if the present value of the benefits outweigh that of the costs, that is if the net present value of the investment is positive.

The Demand for Human Capital

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Demand for human capital is derived as the amount where NPV = 0 for a given interest rate, or by solving for the rate of return where NPV = 0 for a given level of investment.

The Supply of Human Capital

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Supply of human capital is derived from the marginal cost of obtaining funds for investing in each level of education.

Different Equilibrium HC Investments

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Differences in HC investments can stem from either differences in demand or in supply. In the not unlikely case that supply and demand curves for individuals are correlated, differences in outcomes are accentuated.

A Signaling Model of HC Investment

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Type A: low productivity, high cost of education.

Type B: high productivity, low cost of education.

$10 if have at least E*, $5 otherwise.

The goal is to require a level of education for the higher wage that will perfectly separate out the high and low productivity types. Here the net from E* is only $3 for type A, so they get E0 and make $5.

The Optimal Level of the Signal

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Signal level E1 is too low, both types will get the signal. Signal level E2 is too high, neither type will get the signal. Signal level E* will perfectly separate the two types.

The optimal signal, E*, not only perfectly separates the two types, but does so with the lowest possible cost, as shown above.

A Cobweb Model

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It takes time to get education, so the SR supply to some high-skill occupations is vertical. If the investment decision is based on current wages, a cobweb model may result in order to transition to a new equilibrium after a dmd shift.

Shared Costs of Firm-Specific TrainingW/out training constant MP*. During training MP0 and after training MP1. If general expect W=MP both periods, since will be worth MP1 to all firms.

Specific training costs are usually shared, by the firm paying above MP during training but under it after. However, the PV of job with training must be as much or more as that of a job without training.

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