chap09_IV_431_2008

Slide 1: 

Education as Human Capital Enhancement-Part II Topic 3 Part IV

Comments on the Human Capital Model Assumptions : 

Comments on the Human Capital Model Assumptions The simplifying assumptions used in the model may not hold in practice

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) Additional costs and benefits from education a) The process of acquiring education may directly yield utility or disutility The existence of the “consumption” component on the educational process does not imply that the “investment” component is irrelevant. But it indicates that human capital decisions may not be based on investment criteria alone

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) Individual who enjoys learning will acquire more education than would be predicted on the basis of financial costs and benefits, and vice versa for those who dislike the process of acquiring knowledge The decision continues to be based on costs and benefits but these concepts need to be broadened to include non-financial benefits and costs

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) b) In addition to increasing one’s future earnings, education can provide additional future benefits Education may open up a more varied and interesting set of career opportunities, in which case job satisfaction would be higher among those with more education

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) c) The acquisition of knowledge may also alter people’s preferences and therefore future consumption patterns, possibly enhancing their enjoyment of life for a given level of income These additional effects of education can be incorporated into the theory, but they present a challenge for measurement and empirical testing

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) 2) The returns to education are unlikely to be known with certainty so that the investment decisions must be based on individual’s expectations about the future. Because some alternatives may be less certain than others, attitudes toward risk will also play a role

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) Risk-neutral individuals will choose the amount of education that maximizes the expected net present value of lifetime earnings Risk-averse individuals will place more weight on expected benefits and costs that are certain than those that are uncertain

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) 3) Financing is an important aspect of the investment decision In the case of human capital investments, financing is problematic because the individual cannot use the future value of human capital (i.e., the anticipated future earnings) as collateral for the loan

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) In contrast, physical assets (machinery, equipment, land) can be pledged as loan collateral Therefore, there is a fundamental difference between physical and human capital in terms of the degree to which “perfect capital markets” prevail

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) In the absence of subsidized tuition, student loan programs, and similar policies, the problems associated with financing human capital investment could prevent individuals from choosing the amount of education that would maximize their Net PV of lifetime earnings Even under these policies, borrowing constraints may influence the decision about investment on education

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) 4) The model abstracts for asymmetry of information about innate abilities of workers

Comments on the Human Capital Model Assumptions (cont.) : 

Comments on the Human Capital Model Assumptions (cont.) If asymmetry of information is included in the analysis, the differential in wages for different levels of education can be seen as compensation To the higher productivity increased by the additional education To the innate abilities of workers that are signaled by the additional education

Comments on the Role of Education : 

Comments on the Role of Education We do not expect in real life that education acts strictly as a signaling mechanism Most educational programs provide some skills and knowledge that raise the productivity of workers

Comments on the Role of Education : 

Comments on the Role of Education However, it is possible that some forms of education or training act primarily as a signal, while other forms involve primarily human capital acquisition which raises productivity and earnings In this case, the predictions of one model will be more appropriate than the other model’s predictions