Chapter 9 - Human capital theory: Applications to education and training. This chapter presents the following content: Factors that determine the market rate of return to education, Is education economically worthwhile? Is education a predictor of greater productivity? Market signaling and screening, government-funded training programs. | Chapter Nine Human Capital Theory: Applications to Education and Training Created by: Erica Morrill, Fanshawe College © 2002 McGraw-Hill Ryerson Ltd. Chapter Focus Factors that determine the market rate of return to education Is education economically worthwhile? Is education a predictor of greater productivity? Market signaling and screening Government-funded training programs Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Human Capital Theory Investments are made to improve productivity and earnings Costs incurred with the expectation of future benefits Benefits must exceed costs by a significant amount Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Costs Direct costs books, tuition Opportunity cost income forgone Private Costs/Social Costs Real Costs/Pecuniary or transfer costs Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Figure Alternative Income Streams Earnings 16 18 22 d Direct costs a Stream A b e Stream B c f Stream C Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. | Chapter Nine Human Capital Theory: Applications to Education and Training Created by: Erica Morrill, Fanshawe College © 2002 McGraw-Hill Ryerson Ltd. Chapter Focus Factors that determine the market rate of return to education Is education economically worthwhile? Is education a predictor of greater productivity? Market signaling and screening Government-funded training programs Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Human Capital Theory Investments are made to improve productivity and earnings Costs incurred with the expectation of future benefits Benefits must exceed costs by a significant amount Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Costs Direct costs books, tuition Opportunity cost income forgone Private Costs/Social Costs Real Costs/Pecuniary or transfer costs Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Figure Alternative Income Streams Earnings 16 18 22 d Direct costs a Stream A b e Stream B c f Stream C Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Age-Earnings Profiles Increase with age but at a decreasing rate Higher for those with more education Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Choosing an Income Stream Simplifying assumptions no direct utility or disutility from education hours of work are fixed income streams associated with education amounts are known individuals can borrow and lend at the real interest rates Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Human Capital Investment Decision Quantity of education maximizes the net present value of lifetime earnings Human capital wealth can be distributed by borrowing and lending Increase education until present value of benefits of additional year equals present value of additional costs Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Implications of Theory Investment should be made early in one’s life Little incentive for individuals experiencing discontinuity in workforce Chapter 9- © 2002 McGraw-Hill Ryerson Ltd. Factors Influencing Education Income tax .
