Human Capital Investment -

The process of increasing the household’s holdings of human wealth either by engaging in formal or informal training or by adding household members.

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Examples of Human Capital Investment...

 getting a college education  teaching your son or daughter how to cook  learning carpentry skills in an apprentice program  sharing your life with a partner  having a child  reading the newspaper 2

Theory of Human Capital Investment

    People are investing in human capital by going to school.

The returns (or benefits) of this human capital investment include   higher earnings lower probability of unemployment The costs include foregone earnings while in school and out-of pocket costs of education Brighter individuals get more education because they are more likely to see that the marginal benefits exceed the marginal costs.

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Investment in Education

 What are the differences in earnings by educational attainment?

 Holding years of education constant, why do earnings vary by  occupation?

 gender?

 race?

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Career Choice Factors

 Job-an employment position obtained mainly to earn money  Career-a commitment to a profession that requires continued training and offers a clear path for occupational growth.

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Career Choice Factors

 Level of formal training affects financial success  Training may be viewed in two main categories 

Technical Skills

refers to specialized career training for a specific profession.

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General Skills

are traits adaptable to most work situations. Some can be acquired at school, while others require experience.

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Career Choice Factors

PERSONAL FACTORS  Aptitudes - What natural abilities, such as working well in team settings, do you possess?

 Interests inventories - Help you determine what gives you satisfaction.

 Your personality - How much structure do you like?  Do you perform best in low-pressure or high-pressure working environments?

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Average wages, all workers over 25 – 2007

Doctorate Professional Degree Masters Degree Bachelor's Degree HS < HS 0 33,609 21,881 70,559 59,365 95,785 121,340 50,000 100,000 150,000 Avg Salary

Data: Current Population Survey (CPS) 2008 8 http://pubdb3.census.gov/macro/032008/perinc/new03_001.htm

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Developing a Career Action Plan 10

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Obtaining Employment Experience

 Part-time employment  Volunteer work  Internships  Campus projects 12

Using Career Information Sources

    Library Media Center Online Career Services Office (SSB 350, 581-6786) 13

Social Influences

City 1 Index number x salary City 2 Index number = $ buying power Cityrating.com/costofliving.asp

Bestplaces.net/col (separates into categories) 14

Networking

 Community organizations  Professional organizations  Business contacts 15

Identifying Job Opportunities

 Job advertisements  Career fairs (Career Fair February 10, 2011, 10:00am-2:00pm Union Ballroom)  Employment agencies  Job creation  Other methods 16

Applying for Employment

 Resume  Cover letter  Interview 17

Accepting an Employment Position

 Work environment  Factors affecting salary 18

Cumulative Earning Potential Based on Degree Earned

Education

No high school graduation High school graduate Bachelor’s degree Advanced degree

Avg. Income

$1,573,851 $2,342,793 $4,281,887 $6,207,032 19

Evaluating Employee Benefits

 Meeting employee needs  Flexible work schedules   Work-at-home arrangements Legal assistance  Flexible spending plans  Comparing benefits   Market value Future value  Tax impact 20

Tax-Equivalent Employee Benefits

Value of the benefit this formula calculates the tax-equivalent value of a (1-Tax Rate) non-taxable benefit. Example: Receiving a $350 tax free benefit is worth $486 of taxable benefits if you are in the 28 percent tax bracket, calculated as follows: $350 = $350 1-.28 .72 =$486 A variation of this formula would give the after-tax value of a taxable benefit: Taxable value of the benefit x (1-Tax Rate) Using the above example, $486 (1-.28) = $486 (.72) = $350 21

Changing Careers

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Variation in Earnings Within Education Levels

Grades 9-11 31 51 12 3 1 High School Graduate Some College, No Degree Associate Degree 8 Bachelor's Degree 5 11 19 23 39 40 46 27 31 27 23 19 12 14 Master's Degree or Higher 2 12 22 19 $1 - $19,999 $20,000-$39,999 $40,000-$59,999 $60,000-$79,999 $100,000 or more 13 8 2 5 5 10 23

The Return on Educational Investments has Grown Over Time

    Earnings of BA/BS recipients have grown more than inflation over the last 30+ years, with advanced degree holders capturing the largest return Earnings of high school graduates have lost ground relative to inflation.

The typical bachelor’s degree recipient can expect to earn 73% more over a 40 year working life than the typical high school graduate ( http://tsp.convio.net/site/PageServer?pagename=education_pays ) By the age of about 33, the typical college graduate has earned enough to compensate for both paying full tuition and fee charges at the average public four-year college and foregone earnings with a high school degree ( http://tsp.convio.net/site/PageServer?pagename=education_pays ) 24

Unemployment Rates and Earnings Differences by Education

Data are 2008 annual averages for persons age 25 and over. Earnings are for full-time wage and salary workers.

Unemployment Rate 2.0% 1.7% 2.4% 2.8% 3.7% 5.1% 5.7% 9.0% Educational Level Doctoral Degree Professional Degree Master’s degree Bachelor’s degree Associate degree Some college, no degree High-school graduate Less than a high school diploma Median Weekly Earnings $1,561 $1,531 $1,233 $1,012 $757 $699 $618 $453 Source: Bureau of Labor Statistics, Current Population Survey. http://www.bls.gov/emp/ep_chart_001.htm

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What are the costs? (2009 #s)

University of Utah $5,332 Tuition & fees for 2 semesters Books Foregone Earnings (2008 HS degree – men, $618 x 52)

Total Costs

$1,800 $32,136

$38,268

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Cost-Benefit Assessment...

 Do the marginal benefits of education outweigh the marginal costs at the University of Utah?

 Compute the present value of the annuity (PVA) for both the marginal costs and marginal benefits and compare:  For the costs, use n = 5, I = 10%, FV = $38,268  For the benefits, use n=40, I = 3%, FV = $20,488 (($1,012 - 618) x 52)  Marginal Costs: PVA = $233,626 Marginal Benefits: PVA = $1,544,816 27

Cost-Benefit Assessment...

 In this instance, the benefits are clearly greater than the costs, but this may be an underestimate of the actual net benefits… Why?

 May understate income growth more than college costs because of the difference in the time horizon.

 Does not factor in the value of the retirement benefits that are likely to accrue because of a better job.

 Does not factor in other fringe benefits that are typically associated with a better job (e.g., health insurance, disability insurance, child care subsidies).

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Are Gains in Earnings and Related Financial Factors the Only Benefits of a College Education?

 Other benefits that accrue to the individual or household…  greater efficiency in household production activities (e.g., shopping behavior, family finances, child development)  greater non-pecuniary benefits of employment (e.g., occupations where you set your own hours, work at home, do more challenging tasks, reduce health risks)  better relationships in general; especially better marriage rltnshps 29

Are Gains in Earnings the Only Benefits of a College Education?

 Other benefits that accrue to society (i.e., social benefits)  more informed voters and more likely to participate in the political process  additional earnings raise the tax base  less likely to engage in illegal activities 30

Reported Voting Rates by Age and Education Level, 2000 Source: U.S. Census Bureau. (2002).

Voting and Registration in the Election of November 2000.

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Incarceration Rates by Education Level, 1997 Source: Harlow, C.W. (2003).

Education and Correctional Populations.

Bureau of Justice Statistics, Department of Justice. NCJ195670.

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If education is such a good investment, why doesn’t everyone get a Ph.D.?

 Situations where the opportunity costs are exceptionally high.

 Situations where the out-of-pocket costs are prohibitively high (e.g., low-income households).

 Situations where other, non-pecuniary costs are quite high (e.g., time needed to study).

 Situations where the marginal benefits are exceptionally low.

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Mean Annual Earnings by Occupation 2006

Sales Food Prep Healthcare Support Healthcare Education Social Services Architecture/Engineering Computer Financial Analysts Business Management $39,948 $17,634 $24,568 $55,759 $47,681 $39,496 $66,063 $72,117 $69,065 $59,193 $83,827 $0 $20,000 $40,000

Data: BLS http://www.bls.gov/ncs/ocs/sp/ncbl0910.pdf

$60,000 $80,000 $100,000

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Why do earnings vary by occupation, controlling for years of education?

 Cost-Benefit Differentials   Recognition of differential educational investment (e.g., acquiring economic knowledge may be easier than acquiring chemistry knowledge) Recognition that some occupations confer enjoyment above and beyond salary while others do not.

 Recognition that there may be risks to the employee that one needs to compensate for (e.g., health considerations  Recognition that some jobs require more hours of work than others.

 Recognition of differentials in on-the-job training.

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