Transcript Human Capital Investment

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...
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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
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Theory of Human Capital Investment
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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-ofpocket 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
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What are the differences in earnings by
educational attainment?
Holding years of education constant, why
do earnings vary by
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occupation?
gender?
race?
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Career Choice Factors
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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
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Level of formal training affects financial success
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Training may be viewed in two main categories
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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
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Aptitudes - What natural abilities, such as working well
in team settings, do you possess?
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Interests inventories - Help you determine what gives
you satisfaction.
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Your personality - How much structure do you like?
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Do you perform best in low-pressure or high-pressure
working environments?
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Average wages, all workers over 25 –
2007
Doctorate
95,785
121,340
Professional Degree
Masters Degree
70,559
Avg Salary
59,365
Bachelor's Degree
HS
33,609
21,881
< HS
0
50,000
100,000
150,000
Data: Current Population Survey (CPS) 2008
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http://pubdb3.census.gov/macro/032008/perinc/new03_001.htm
Source: www.collegeboard.com
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Developing a Career Action Plan
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Obtaining Employment Experience
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Part-time employment
Volunteer work
Internships
Campus projects
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Using Career Information Sources
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Library
Media Center
Online
Career Services Office (SSB 350, 581-6786)
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Social Influences
City 1
City 2
Index number x salary
Index number
= $ buying power
If Omaha, Nebraska has an index number of 93.3 and Chicago has an
index number of 123, a person moving from Omaha making $30,000
annually would need to make $39,550 in Chicago to be making the
same real salary:
123 x $30,000
93.3
= $39,550
Cityrating.com/costofliving.asp
Bestplaces.net/col (separates into categories)
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Networking
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Community organizations
Professional organizations
Business contacts
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Identifying Job Opportunities
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Job advertisements
Career fairs (Career Fair Prep Week Jan 24-Feb 3)
Employment agencies
Job creation
Other methods
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Applying for Employment
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Resume
Cover letter
Interview
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Accepting an Employment Position
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Work environment
Factors affecting salary
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Cumulative Earning Potential Based on Degree Earned
Education
Avg. Income
No high school graduation
$1,573,851
High school graduate
$2,342,793
Bachelor’s degree
$4,281,887
Advanced degree
$6,207,032
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Evaluating Employee Benefits
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Meeting employee needs
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Flexible work schedules
Work-at-home arrangements
Legal assistance
Flexible spending plans
Comparing benefits
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Market value
Future value
Tax impact
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Tax-Equivalent Employee Benefits
Value of the benefit
(1-Tax Rate)
this formula calculates the tax-equivalent value of a
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
1-.28
=
$350
.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
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Changing Careers
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Variation in Earnings Within Education Levels
Grades 9-11
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High School Graduate
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Some College, No Degree
$1 - $19,999
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$20,000-$39,999
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$40,000-$59,999
$60,000-$79,999
5
19
19
2
5
14
27
22
31
8
27
39
5
2
23
40
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Bachelor's Degree
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46
11
Associate Degree
Master's Degree or Higher
51
10
13
$100,000 or more
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The Return on Educational
Investments has Grown Over Time
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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)
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Unemployment Rates and Earnings Differences
by Education
Data are 2010 annual averages for persons age 25 and over. Earnings are for full-time wage and salary workers.
Unemployment Rate
Educational Level
Median Weekly Earnings
1.9%
Doctoral Degree
$1,550
2.4%
Professional Degree
$1,610
4.0%
Master’s degree
$1,272
5.4%
Bachelor’s degree
$1,038
7.0%
Associate degree
$767
9.2%
Some college, no
degree
$712
10.3%
High-school graduate
$626
14.9%
Less than a high school
diploma
$444
Source: Bureau of Labor Statistics,
Current Population Survey.
http://www.bls.gov/emp/ep_chart_001.htm
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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
Educational Level
Median Weekly Earnings
2.0%
Doctoral Degree
$1,561
1.7%
Professional Degree
$1,531
2.4%
Master’s degree
$1,233
2.8%
Bachelor’s degree
$1,012
3.7%
Associate degree
$757
5.1%
Some college, no
degree
$699
5.7%
High-school graduate
$618
9.0%
Less than a high school
diploma
$453
Source: Bureau of Labor Statistics,
Current Population Survey.
http://www.bls.gov/emp/ep_chart_001.htm
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Unemployment Rates and Earnings Differences
by Education
Data are 2010 compared to 2008 annual averages for persons age 25 and over. Earnings are for full-time wage and salary workers.
Unemployment Rate
Educational Level
Median Weekly Earnings
1.9% ( .1%)
Doctoral Degree
$1,550 ( $11)
2.4% ( .7%)
Professional Degree
$1,610 ( $79)
4.0% ( 1.6%)
Master’s degree
$1,272 ( $39)
5.4% ( 2.6%)
Bachelor’s degree
$1,038 ( $26)
7.0% (
3.3%)
Associate degree
$767 ( $10)
9.2% ( 3.1%)
Some college, no
degree
$712 ( $13)
10.3% ( 4.6%)
High-school graduate
$626 ( $8)
14.9% ( 5.9%)
Less than a high school
diploma
$444 ( $9)
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? (2011 #s)
Tuition & fees
for 2 semesters
Books
Foregone
Earnings
University of
Utah
$7,768
$1,800
$32,552
(2010 HS degree – men, $626 x 52)
Total Costs
$42,120
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Cost-Benefit Assessment...
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Do the marginal benefits of education outweigh
the marginal costs at the University of Utah?
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Compute the present value of the annuity (PVA) for both the marginal costs and
marginal benefits and compare:
 For the costs, use n = 5, r = 10%, FV = $42,120
 For the benefits, use n=40, r = 3%, FV = $21,424 (($1,038 - 626) x 52)
Marginal Costs:
PVA = $257,143
Marginal Benefits:
PVA = $1,615,391
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Cost-Benefit Assessment...
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In this instance, the benefits are clearly greater than the
costs, but this may be an underestimate of the actual net
benefits… Why?
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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?
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Other benefits that accrue to the individual or
household…
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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
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Are Gains in Earnings the Only Benefits of
a College Education?
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Other benefits that accrue to society (i.e., social
benefits)
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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
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If education is such a good investment,
why doesn’t everyone get a Ph.D.?
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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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Why do earnings vary by occupation,
controlling for years of education?
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Cost-Benefit Differentials
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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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