Economics 324: Labor Economics

1
Economics 324 Labor Economics

• Any questions?
• Read Ch. 4 5

2
CWD Numerical Example

• Consider a worker who ranks combinations of
  leisure hours (L) and income (Y) according to the
  utility function U L2Y. Total time available
  (T) is 300 hours, the wage rate (w) is 4 per
  hour and non-labor income (V) is 0.
• What are the optimal number of leisure hours,
  work hours, level of income, and utility level?
• Now suppose the individual is forced, through
  additional layoffs, to consume 250 leisure hours.
  What must the level of income be for this person
  to stay at the level of utility attainable before
  the layoffs?
• What is the CWD associated with the higher layoff
  policy?

3
CWD Numerical Example

• Assume the person has a new utility function. In
  this case, the person derives utility from
  consuming leisure and income in fixed proportions
  where the proportion is 2 of income for one hour
  of leisure.
• How did the change in preferences affect the size
  of the compensating wage differential associated
  with constrained work hours? Explain the
  intuition behind your findings.

4
Human Capital Theory

• Give a man a fish and you feed him for one day.
• Teach a man to fish and you feed him for a
  lifetime.
• Chinese proverb
• Theory of Compensating Wage Differentials
  suggests that wages differ among people because
  jobs are different.
• Wages also differ because people are different.
• A persons human capital is their unique set of
  knowledge, skills, experience, and ability.
• Human capital can also be thought of as ones
  accumulated investments in education, job
  training, and migration while Non-human capital
  is societys stock of natural resources,
  building, machines, etc. (64 avg)
• Three types of investment in human capital
• 1. education and training
• 2. migration
• 3. job search

5
Optimal Acquisition of Human Capital

• Comparison of benefits and costs
• Costs
• Benefits
• Present value of a stream of benefits/costs
• Relevant comparison PV(B) gt PV(C)
• Assume utility maximization
• Assume lifetime perspective taken
• Two methods
• 1. Present value method specify r compare
• 2. Internal rate of return method solves for r
• Assume MC of another unit of HC is constant
• MB declining because another year of school
  creates shorter time horizon

MC
PV(MB)
PV(MB)
Human Capital
HC
HC
6
Optimal Acquisition of Human Capital

• Present Value method example
• An unskilled laborer earns 20,000 per year.
  Suppose that by taking courses at UNC Tech for a
  year, the person can qualify for a job paying
  23,000/year, lasting 10 years.
• Tuition/books for the year cost 2,000. r
  6
• Is this a good investment?
• Internal Rate of Return method example
• A worker is offered a salary bonus of 2,000 per
  year for 2 years if he or she enrolls in a job
  training program this year. Total cost is 3,500
  (including forgone earnings)
• (a) what is the internal rate of return for this
  investment? 9.38
• (b) Is it a good investment for someone with a
  discount rate of 6?
• (c) What is the highest discount rate a person
  can have and still find this investment
  attractive? Why might people have higher
  discount rates?
• (d) Why are older workers less likely to seek
  out or be offered on-the-job
  training?

7
Demand for College Education

• Lets measure the demand for college education by
  the of graduating HS seniors who matriculate
  (this abstracts from finances or grades/SAT)
• Gender 1970 1980 1990 1993 1996
• Men 55.2 46.7 57.8 59.7 60.1
• Women 48.5 51.0 62.0 65.4 69.7
• Avg increase 0.3 1.0 1.0
• Consumption or Investment?
• Choice is broadly between two lifetime income
  streams
• Predictions of our theory
• 1. r
• 2. T
• 3. C
• 4. B
• Expectations are important in 4 ? Could have
  cobwebs in college attendance

8
Age-Earnings Profiles

• Age-earnings profiles display four main patterns
• 1. Average earnings (for full-timers) tend to
  rise with level of education
• 2. Concavity
• Murphy Welch (1990), JoLE 2/3 of career wage
  growth occurs in first 10 years of work.
• 3. Higher educated individuals have steeper
  profiles
• (fanning out)
• 4. Female profiles are less concave and fan out
  less than male
• Reasons?

9
Returns to Education

• Is additional education a good investment?
• Studies of the monetary costs and benefits
  estimate a real internal rate of return to
  education at 5 - 15
• So educational investments are comparable to
  financial investments
• Caveats
• 1. Upward bias
• 2. Downward bias
• 3. Selection bias

10
Selection Bias Example

• Doug is adept at blue-collar work (no training
  required) Wendy at white-collar work
  (requiring another year of schooling)
• Worker Earnings in Blue-Collar job Earnings in
  White-Collar job
• Doug 20,000 40,000
• Wendy 15,000 41,000
• With 10 discount rate, and people living for
  only 2 periods,
• Worker PV if no more school PV if go to
  school
• Doug 38,181 36,363
• Wendy 28,636 37,273
• We observe 38,181 and 37,273 in the actual data
• Did Wendy make a big mistake?
• No! This is comparing apples to oranges because
  workers sort themselves into occupations. Doug
  Wendy both made the right choice for them.
• Comparative advantage is important factor in
  making choices about schooling occupations.