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ECOS3008
Labour Economics
Module 3: Education & Human Capital
Reading: ES Ch9
Lecture 3: Education and Human Capital
Outline
1. Background and Stylised Facts
2. Human Capital Model
i. Background
ii. Formal Model: Optimal investment in education
iii. Extensions
3. Signalling Model
Reference: ES Chapter 9
2
Introduction and Background
Statistics
Introduction
Human Capital and Schooling
• Last 2 weeks: Labour Supply - static and dynamic issues - quantity
dimension
• This week: consider education and schooling - quality dimension
of labour supply: skills individuals bring to the labour market
àoptimal response to market incentives
àtreat like an investment decision
àempirical issue of identifying 'rate of return' to the investment
4
Background Statistics
• Percent of Pop with at least Upper Secondary (Year 12), 2011
25-64 25-34 35-44 45-54 55-64
US 89 89 89 89 90
UK 77 84 80 75 67
Australia 74 84 78 69 61
France 72 83 78 68 58
Italy 56 71 60 52 40
OECD Mean 75 82 78 73 64
5
Background Statistics
Evidence shows that higher educational attainment strongly correlated
with:
• employment (higher);
• unemployment (lower); and
• earnings (higher).
The Important Questions:
• What determines the level of education selected by an individual?
• How do we choose the particular set of skills that we offer to employers?
• How do our choices affect the evolution of earnings over the working
life?
• Is investment in education a good investment?
Answers are relevant for ‘on-the-Job' training, and age-earnings profile,
earnings distribution
6
Human Capital Model
Human Capital Model
2. Human Capital Model
• Main elements of human capital (HC) theory have a long history:
Adam Smith (1776: 101)
• When any expensive machine is erected, the extraordinary work to
be performed by it before it is worn out, it must be expected, will
replace the capital laid out upon it, with at least ordinary profts. A
man educated at the expense of much labour and time to any of
these employments which require extraordinary dexterity and skill,
may be compared to one of those expensive machines. The work
which he learns to perform, it must be expected, over and above the
usual wages of common labour, will replace to him the whole
expense of his education, with at least the ordinary profts of an
equally valuable capital.