Econ labor market policy evaluation

ECON 370 - Chapter 9 - Labour Economics

Maggie Jones

Why do people obtain education?

Why do people obtain education?

I Our discussion of labour supply has focused on the quantity aspect

I extensive margin: do individuals provide labour at all? I intensive margin: how much labour to provide?

I So far we have ignored the quality dimension I quality encompasses education, training, labour market

information, mobility, and health

Why do people obtain education?

I Two prevailing theories: I Becker (1964): Human Capital Model

I investments are made in human resources to improve productivity and hence earnings

I Spence (1974): Signalling Model I education is used to signal or “sort” workers of di↵ering

abilities

Human Capital Model

Human Capital Model

I Education enhances productivity I Costs are incurred now because of the expectation of future

benefits

I costs:

I benefits:

Human Capital Model

I Decision rule: go to school if the benefits exceed the costs I Model is a simplification in that it only considers:

I investment components (ignores consumption components) I private components (ignores social components)

Return to Schooling

Return to Schooling

Age-Earnings Profile by Education

I Environment consists of 3 levels of schooling I Each level of education is associated with an age-earnings

profile

I None = < High School =) enter workforce at age 16 and earn Ynone

I HS = High School Degree =) enter workforce at age 18 and earn Yhs

I PS = Post-Secondary Degree =) enter workforce at age 22 and earn Yps

I Assume Ynone,t < Yhs,t < Yps,t 8t I Education is costly: tuition, books, opportunity costs

Age-Earnings Profile by Education

Assumptions

I No psychic utility/costs from education I hours of work are fixed I expected income is known for each level of education I individuals can borrow or lend at rate r

Age-Earnings Profiles by Education

E ar ni ng s

Age

Signaling Model

Signaling Model

I Education does not increase productivity I Workers are still rewarded for productivity, but their

productivity varies according to their underlying ability

I Employers do not know underlying ability, so must use “signals” to infer productivity

I In this sense, imperfect information is embedded in the signaling model

I Individuals know their productivity and employers wages and choose education to maximize their utility