3. Methodology [ The Concept of Human Capital ]
Definition Components Accumulation
Formula
Early
can be defined as
Skillsskills, attitudes, aptitu
knowledge, Ability
des, and other acquired traits
contributing to production
4. Formula
The present value of an individual at any given age a is
defined as the sum of his discounted expected future
Input-based Output-based
earnings (equal to the value of productivity)
by summing up the by considering
represents the probability of an individual of age a to be
costs of alive at age t and r is capitalized earnings
production the discount rate
5. Accumulation of human capital
post school training provided
off-the-job training by "for-profit" proprietary
institutions
post-school training provided
on-the-job training by the current employer
the individual devotes his
Formal schooling whole time to learning
7. Framework of the Paper
General Vs Specific Human Capital
The life-cycle of
The Rate of Return to Education
earnings
Skills Function
The Education Production
Ability
Signaling Approach
9. General Vs Specific Human Capital
General Specific
is defined to be not
increases the
only useful with the
Theoretical Framework
productivity of the
current employer but
worker only in his
also withEmpirical Studies
other
current job
potential employers
Perfect Markets Imperfect Markets
10. General Human Capital : Perfect Markets
Theory Empirical studies
On the one hand,labor markets, where workers receive
In competitive it is supported by the empirical analysis
ofwages equal tohe finds that firm-sponsored training is
Veum (1999), their marginal product, firms cannot
recoup investments inrelated to starting wages, butthat
indeed negatively general skills, which implies
they refuse to pay for generalgrowth .
positively related to wage training
This "hold-up" problem arises due to incomplete
Furthermore, workers can finance such investments quite
On the other hand, many analyses question the validity
contracts which means that one party (i.e. the employer)
of easily by accepting a wage below their productivity
this by showing that there are investments in general
pays the costs of the investment in human capital, while
human capital which are financed by the employer
during the period of training
another party (i.e. the worker) shares in the return
11. Sources of Labor Market Imperfection
2.the presence of asymmetric informationdue tobetween
3. The presence of asymmetric information the worker
4. wage compression may arise between the
1. The presence other potentialworker’s effort
and the currentof generaltransaction skills
the current firm and of and specific costs
interaction employer concerning the employers
For example
If general 2 possible types of are complements in the
due to matching and search skills asymmetric information
There are and specific frictions, imperfect information
Hence, wages must satisfy the
about potential output, partners, the absence of perfect
production ofcontractual the presence of specific skills
incentive compatibility constraints
The first concerns the amount of training the worker has received. If
insurance markets, limited mobility, congestion dueand large
increases the productivity of general human capital
potential employers cannot observe the correct productivity
to thus pay
numbers, and the marginal product, the wage structure is compressed
a wage below other similar factors .
which leads to a compressed wage
The second is about structure
In practice, it is difficult the innate ability of thetheir existing jobs
for workers to quit worker (hidden
On the other hand, the learns aboutfirm-specific skills by
knowledge), i.e. the employer value of the ability of the worker
and find new suitable employers. Similarly, it is costly for firms
when general general training
providing
increasestheir employees skills are acquired
to replace
12. General Human Capital : Imperfect Markets
Theory Empirical studies
Concerning the empirical evidence, Loewenstein and
If the wage structure is compressed, general skills are
Spletzer (1998) find that general training raises future
turned into specific skills and firms manage to skim labor
wages more for workers who change their job than for
market rents depending on the amount of training
workers who remain with the training firm.
Hence, the wage function increases withshows thattraining less
As aFurthermore, Brunello (2002) the level ofworkers to
consequence, firms prefer more skilled wage
steeply than productivity (i.e. the wage structure is
compression andand invest inthegeneral training show a
less skilled ones the amount of firm’s profit, equal to the
compressed), which implies that
general training until the
positive gap and significant correlation
positive level of training satisfies
desired between productivity and wage
13. General Human Capital : Perfect Markets
Theory Empirical studies
Lynch (1991) finds(1964), training in specific on-the-job training are less
According to Becker that individuals with human capital is different from
general training because workers do not benefit from higher productivity after
likely to leave their current employer while individuals with off-
changing their jobs. Both in perfect and imperfect labor markets, firms can
the-job investments in more likely andquit indeed negatively related to
recoup training are specific skills to thus are willing to share some of the
starting wages, costspositively related to wage growth
but of these investments
Both in perfect and forspecific labor markets, leads can
In almost the study of Switzerland shows thatfirms to
An empirical same manner, Loewenstein and specific
The accumulation imperfect human capital Spletzer
training investments in specificboth firmsand job mobility
recoup reduces both because skills and thus workers
(1999) find that specificsearch activity and are willing
lower fluctuations job training and job mobility are
while general training significantly increases job search
to share fromnegatively correlated. investments
benefit somekeepingcosts of these
of the their contractual partner
14. General Vs Specific Human Capital
Type of Labor
Firms Workers Total investment
skill markets
general perfect no yes efficient
general imperfect yes yes generally inefficient
specific perfect yes yes generally inefficient
specific imperfect yes yes generally inefficient
15. Framework of the Paper
General Vs Specific Human Capital
The life-cycle of
The Rate of Return to Education
earnings
Skills Function
The Education Production
Ability
Signaling Approach
19. The "full" or "elaborate" method
The elaborate method amounts to working with detailed age-
earnings profiles by level of education and finding
the discount rate that equates a stream of education benefits to a
stream of educational costs at a given point in time.
The annual stream of benefits The stream of costs consists of
is typically measured by the foregone earnings of the
1. the earnings advantage of a graduate individual while in school
of the educational level to which the (measured by the mean earnings
rate of return is calculated, and of graduates of the educational
2. the earnings of a control group of level that serves as control
graduates of a lower educational level group)
20. The basic "earnings function" method
In this semi-log earnings function specification the coefficient on
involves the fitting of a semi-log ordinary least squares regression
years of schooling can be the natural as the average private
the dependent variable ; interpreted logarithm of earnings rate of
return to one additional years of schooling and potential years
Independent variables; year of education, regardless of the of
educational level to which this year of schooling refers to
labor market experience and its square
Linear Non-Linear
21. The Extended "earnings function" method
by converting the continuous years of schooling variable into a
series of dummy variables referring to the completion of the main
schooling cycles, i.e. primary, secondary and higher education, or
referring to drop outs of these levels, or even to different types of
curriculum (say, vocational versus general) within a given level
After fitting such extended earnings function the private rate of
return to different levels of education can be derived by
comparing adjacent dummy variable coefficients
23. The type of acquired skill
Finally, Rubb (2003) investigates the effects of overeducationa,
According to Wasmer (2006), specific human capital yields
required education general human capital investmentsthe
higher return than and undereducation by estimating if the
following log-linear wage equation for individual
job-finding rate is low
Furthermore, individuals who completed schooling with
some formal qualification have significantly larger returns
than individuals with the same amount of schooling but
without any formal qualification (Dearden (1998)).
24. The Rate of Return Depending on Gender
Studies find that investments in women’s education tend to
yield higher rates of return than investments in men’s
education. This gender difference in the returns to
education arises because
the earnings of women are considerably lower than those
of men
Another explanation for the gender wage gap may be the
fertility decision of women which leads to labor market
interruptions. This gives rise to gender differences in the
turnover rate and thus in employment and wages
25. The Rate of Return Depending on Time
the individual returns to education change over time due to
the increased interaction between demand for and supply of
workers at each qualification level
Individuals working in an industry with rapid technological
change have above-average returns to education, which can
be attributed to the positive correlation of education and
adaptability to new technologies in high-tech firms
26. The Rate of Return to Education
Theoretical Empirical
Approach Studies
Criticism
27. Rate of Return to Education
Empirical Studies
Study Estimate
Becker (1964) 13%-28%
Mincer (1974) 11.50%
Ashenfelter and Krueger (1994) 12%-16%
Psacharopoulos (1994) 5%-15%
Dearden (1998) 5.50%-9.30%
Ashenfelter, Harmon, and Oosterbeek (1999) 6.60%-9.30%
Arias and McMahon (2001) 11.70%-13.30%
Wilson (2001) 5%-10%
29. Rate of Return to Education
Problems of Empirical Results
30. Framework of the Paper
General Vs Specific Human Capital
The life-cycle of
The Rate of Return to Education
earnings
Skills Function
The Education Production
Ability
Signaling Approach
31. Signaling Approach
Human Capital Signaling
education as productivity- education as indication
enhancing activity of innate ability
HC models do not naturally generate a positive correlation
between ability differences and education while in sorting
models there is appositive correlation between the ability
to learn and the length of schooling chosen
32. Framework of the Paper
General Vs Specific Human Capital
The life-cycle of
The Rate of Return to Education
earnings
Skills Function
The Education Production
Ability
Signaling Approach
33. The Education Production Function
According to Hanushek (1971), the severest problem in
educational research is the complexity of the
educational process. Hence, there is considerable
confusion about how empirical studies should be
conducted and interpreted
Inputs in Educational Production
34. Input Empirical evidence
level of resources ambiguous
class size weak
school competition weak
private schools ambiguous
teacher quality strong
teacher incentives strong
early education strong
individual ability strong
parental education strong
family income weak
neighborhood weak
peer groups strong
segregation ambiguous
35. Framework of the Paper
General Vs Specific Human Capital
The life-cycle of
The Rate of Return to Education
earnings
Skills Function
The Education Production
Ability
Signaling Approach
36. The life-cycle of earnings
To summarize the results human capital literature deals
An important stream of
with the life-cycle of earnings. and increasing points out
decreasing marginal returns Mincer (1958) marginal
coststhe difference between normally distributed
that lead to an optimal amount of human capital
investment that negatively depends on age
abilities and the positively skewed distribution of
incomes must be due to investments in human capital
over the life-cycle
Limitation
Earnings maximizing Utility maximizing
Becker (1964) suggests that earningshuman capital theory to
A serious problem of the empirical application of increase with age
life-cycle models in earnings is that post-school investments are not
differences models
but at a declining rate because younger workers
directly observable. As a consequence, measurement problems arise because
areceive theactivities might educationon-the-joblonger(Hanushek
wide range of returns to be viewed as over a training period
and the investment risk increases with age
and Quigley (1985)).
37. Implications of Pension Systems for Human
Capital Formation
the return to human capital investments is affected by
the pension system if finite horizon economies are
considered
because the PAYG pension system generates distortions
in labor supply and thus provides incentives for early
retirement, aggregate human capital is lower than with a
capital funded system of old-age provision.
The reason is that the PAYG system discourages human
capital formation both directly and indirectly via the
retirement age
