Transcript Education and Life time wage potential

Education and Life time wage
potential
Chapter 9
Part 1
PERCENT COLLEGE GRADUATES AMONG
MEN AND WOMEN, AGE 25-34, 1940-2002
PERCENT COLLEGE GRADUATES
40%
MALE
FEMALE
30%
20%
10%
0%
1940
1950
1960
1970
1980
1990
2000
PERCENT COLLEGE GRADUATES BY GENDER
AND AGE, 2002
PERCENT COLLEGE
GRADUATES
35
30
25
20
MALE
FEMALE
15
10
5
0
25-34
35-44
45-54
AGE
55-64
LIFE CYLCE LABOR FORCE PARTICIPATION RATES
FOR WHITE WOMEN BY AGE AND BIRTH COHORT
Table 9.1, p. 325
YEAR OF BIRTH
AGE 15-24
AGE 25-34
AGE 35-44
AGE 45-54
1886-1895
N.A.
7.7
9.8
10.1
1906-1915
13.3
16.7
25.3
35.6
1926-1935
24.9
26.7
44.4
53.4
AVERAGE YEAR OF WORK EXPERIENCE FOR
WORKING WOMEN BY AGE AND YEAR
Table 9.2, p. 327
AGE
25
35
45
1920
5.6
11.8
16.4
1950
5.9
10.6
17.0
1980
6.2
11.7
18.3
1986
6.5
13.5
19.3
YEAR
MEAN EARNINGS BY AGE AND EDUCATION,
WOMEN, YEAR-ROUND FULL-TIME WORKERS,
2001
Figure 9.1, p. 316
$60,000
M
E
A
N
E
A
R
N
I
N
G
S
$50,000
HIGH
SCHOOL
GRAD
$40,000
COLLEGE
GRAD
$30,000
$20,000
$10,000
$0
15
25
35
45
AGE
55
65
Life Earnings by Education Level
•
•
•
•
•
•
High School
Vocational Degree
College Degree
Master’s Degree
Ph. D.
Professional Degree
1.36 million
1.71 million
2.31 million
2.81 million
3.75 million
4.29 million
INTERNAL RATES OF RETURN FOR
WOMAN’S COLLEGE EDUCATION WITH
DIFFERENT WORK FORCE PATTERNS
Figure 9.2, p. 317
12
11
10
8.8
8
6.9
5.3
6
4
2
0
WORK ALL
YEARS
NO WORK,
AGE 25-29
NO WORK,
AGE 25-34
NO WORK,
AGE 25-39
The Educational Investment
Decision
• Opportunity Cost of College Career
• Direct vs. Indirect Cost of College
– Direct
• College Tuition
• Books
• Fees
– Indirect
• Forgone wage during school years
The Educational Investment
Decision
College Graduate
Gross Benefits
High School Graduate
Direct
Costs
Indirect
Costs
47 yrs
The Educational Investment Decision
with Discontinuous Worker
College Graduate
Gross Benefits
High School Graduate
Direct
Costs
Indirect
Costs
47 yrs
So what is the Present Value
• First, what is Present Value
Value in the Future
PV 
number of
( 1  int ersest rate)
years
PRESENT VALUE
Orginal Future Value
Annual Interest Rate
PV1
PV2
PV3
PV4
PV5
PV6
PV7
PV8
PV9
PV10
100
100
100
100
100
20.0%
10.0%
5.0%
2.5%
1.0%
YEAR
YEAR
YEAR
YEAR
YEAR
$83.33 $90.91 $95.24 $97.56 $99.01
$69.44 $82.64 $90.70 $95.18 $98.03
$57.87 $75.13 $86.38 $92.86 $97.06
$48.23 $68.30 $82.27 $90.60 $96.10
$40.19 $62.09 $78.35 $88.39 $95.15
$33.49 $56.45 $74.62 $86.23 $94.20
$27.91 $51.32 $71.07 $84.13 $93.27
$23.26 $46.65 $67.68 $82.07 $92.35
$19.38 $42.41 $64.46 $80.07 $91.43
$16.15 $38.55 $61.39 $78.12 $90.53
So what is the Present Value if the Future
Value is growing
• What if Value in Future has a growth
rate
Value in the Future ( 1  growth rate)

number of years

rate
( 1 interest
)
Number of years
So what is the Present Value if the Future
Value is growing
Original Future Value
Annual Interest Rate
Annual Growth Rate
PV1
PV2
PV3
PV4
PV5
PV6
PV7
PV8
PV9
PV10
100
100
20.0%
10.0%
5.0%
5.0%
YEAR
YEAR
$87.50 $95.45
$76.56 $91.12
$66.99 $86.97
$58.62 $83.02
$51.29 $79.25
$44.88 $75.64
$39.27 $72.21
$34.36 $68.92
$30.07 $65.79
$26.31 $62.80
100
5.0%
5.0%
YEAR
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
100
2.5%
5.0%
YEAR
$102.44
$104.94
$107.50
$110.12
$112.80
$115.56
$118.37
$121.26
$124.22
$127.25
100
1.0%
5.0%
YEAR
$103.96
$108.08
$112.36
$116.81
$121.43
$126.24
$131.24
$136.44
$141.84
$147.46
So what is the Present Value if the Future Value is
growing at different rates between those with college
degree and those with no college degree
• What if Value in Future has a growth
rate
PV 
Value in the Future ( 1  growth rate  college premium)
number of years
( 1  int ersest rate)
number years
Examples
• In the following examples a few
assumptions are made:
– College cost is covered strictly from desaving
– Person taking off from work returns to
exact wage prior to leaving work
Example
High School Wage
College Wage
Yearly College Cost
Wage Growth Rate
Annual Interest Rate
College Return
$25,000
$40,000
$15,000
4.0%
7.0%
5.00%
College
Year
Cumulative
Difference
Con-HS
Ncon-Hs
HS
Continous
Non-Continous
Ncon-Con
0
$25,000.00
-$15,000.00
-$15,000.00
-$40,000.00
-$40,000.00
$0.00
1
$24,299.07
-$14,018.69
-$14,018.69
-$78,317.76
-$78,317.76
$0.00
2
$23,617.78
-$13,101.58
-$13,101.58
-$115,037.12
-$115,037.12
$0.00
3
$22,955.60
-$12,244.47
-$12,244.47
-$150,237.19
-$150,237.19
$0.00
4
$22,311.99
$43,075.55
$43,075.55
-$129,473.62
-$129,473.62
$0.00
5
$21,686.42
$43,880.70
$43,880.70
-$107,279.34
-$107,279.34
$0.00
6
$21,078.39
$44,700.90
$44,700.90
-$83,656.82
-$83,656.82
$0.00
7
$20,487.40
$45,536.44
$45,536.44
-$58,607.79
-$58,607.79
$0.00
8
$19,912.99
$46,387.58
$46,387.58
-$32,133.20
-$32,133.20
$0.00
9
$19,354.68
$47,254.64
$0.00
-$4,233.24
-$51,487.88
-$47,254.64
10
$18,812.03
$48,137.91
$0.00
$25,092.64
-$70,299.91
-$95,392.55
College
Year
HS
Continous
Non-Continous
Cumulative
Difference
Con-HS
Ncon-Hs
Ncon-Con
11
$18,284.59
$49,037.68
$0.00
$55,845.73
-$88,584.50
-$144,430.23
12
$17,771.94
$49,954.27
$0.00
$88,028.07
-$106,356.43
-$194,384.50
13
$17,273.66
$50,888.00
$0.00
$121,642.41
-$123,630.09
-$245,272.50
14
$16,789.35
$51,839.17
$0.00
$156,692.23
-$140,419.44
-$297,111.67
15
$16,318.62
$52,808.13
$0.00
$193,181.74
-$156,738.06
-$349,919.80
16
$15,861.09
$53,795.20
$0.00
$231,115.85
-$172,599.15
-$403,715.00
17
$15,416.39
$54,800.72
$0.00
$270,500.18
-$188,015.53
-$458,515.72
18
$14,984.15
$55,825.03
$0.00
$311,341.06
-$202,999.68
-$514,340.74
19
$14,564.03
$56,868.49
$24,021.86
$353,645.51
-$193,541.85
-$547,187.37
20
$14,155.70
$57,931.45
$24,470.87
$397,421.27
-$183,226.68
-$580,647.95
College
Year
Cumulative
Difference
Con-HS
Ncon-Hs
Ncon-Con
HS
Continous
Non-Continous
21
$13,758.81
$59,014.28
$24,928.27
$442,676.74
-$172,057.22
-$614,733.96
22
$13,373.05
$60,117.35
$25,394.22
$489,421.04
-$160,036.05
-$649,457.09
23
$12,998.10
$61,241.04
$25,868.88
$537,663.98
-$147,165.27
-$684,829.25
24
$12,633.67
$62,385.73
$26,352.41
$587,416.05
-$133,446.53
-$720,862.58
25
$12,279.45
$63,551.82
$26,844.98
$638,688.41
-$118,881.01
-$757,569.42
26
$11,935.17
$64,739.71
$27,346.75
$691,492.95
-$103,469.43
-$794,962.38
27
$11,600.54
$65,949.79
$27,857.91
$745,842.20
-$87,212.06
-$833,054.27
28
$11,275.29
$67,182.50
$28,378.61
$801,749.41
-$70,108.74
-$871,858.15
29
$10,959.16
$68,438.25
$28,909.06
$859,228.50
-$52,158.84
-$911,387.34
30
$10,651.89
$69,717.47
$29,449.41
$918,294.07
-$33,361.33
-$951,655.40
College
Year
HS
Continous
Non-Continous
Cumulative
Difference
Con-HS
Ncon-Hs
Ncon-Con
31
$10,353.24
$71,020.60
$29,999.87
$978,961.43
-$13,714.70
-$992,676.13
32
$10,062.97
$72,348.08
$30,560.61
$1,041,246.54
$6,782.94
-$1,034,463.60
33
$9,780.83
$73,700.39
$31,131.84
$1,105,166.10
$28,133.96
-$1,077,032.15
34
$9,506.60
$75,077.96
$31,713.74
$1,170,737.47
$50,341.10
-$1,120,396.37
35
$9,240.06
$76,481.29
$32,306.52
$1,237,978.70
$73,407.57
-$1,164,571.13
36
$8,980.99
$77,910.85
$32,910.38
$1,306,908.56
$97,336.96
-$1,209,571.60
37
$8,729.19
$79,367.12
$33,525.53
$1,377,546.49
$122,133.31
-$1,255,413.19
38
$8,484.44
$80,850.62
$34,152.18
$1,449,912.67
$147,801.04
-$1,302,111.63
39
$8,246.56
$82,361.85
$34,790.53
$1,524,027.96
$174,345.01
-$1,349,682.95
40
$8,015.35
$83,901.32
$35,440.82
$1,599,913.93
$201,770.49
-$1,398,143.44
College
Year
HS
Continous
Non-Continous
Cumulative
Difference
Con-HS
Ncon-Hs
Ncon-Con
41
$7,790.62
$85,469.57
$36,103.27
$1,677,592.88
$230,083.14
-$1,447,509.74
42
$7,572.19
$87,067.13
$36,778.10
$1,757,087.82
$259,289.04
-$1,497,798.78
43
$7,359.89
$88,694.56
$37,465.54
$1,838,422.49
$289,394.69
-$1,549,027.79
44
$7,153.54
$90,352.40
$38,165.83
$1,921,621.35
$320,406.99
-$1,601,214.36
45
$6,952.97
$92,041.23
$38,879.21
$2,006,709.61
$352,333.23
-$1,654,376.38
College
Total
% of HS
% of C-Cl
HS
Continous
Non-Continous
$650,630.41
$2,657,340.03
$1,002,963.64
100.00%
408.43%
154.15%
24.48%
100.00%
37.74%
What if the Interest Rate Goes
Down
High School Wage
College Wage
Yearly College Cost
Wage Growth Rate
Annual Interest Rate
College Return
$25,000
$40,000
$15,000
4.0%
3.0%
5.00%
College
Year
HS
Continous
Non-Continous
Cumulative
Difference
Con-HS
Ncon-Hs
Ncon-Con
41
$37,151.87
$407,586.88
$172,169.10
$5,197,072.96
$1,212,819.50
-$3,984,253.46
42
$37,512.57
$431,329.80
$182,198.37
$5,590,890.19
$1,357,505.30
-$4,233,384.89
43
$37,876.77
$456,455.81
$192,811.87
$6,009,469.23
$1,512,440.40
-$4,497,028.84
44
$38,244.51
$483,045.47
$204,043.63
$6,454,270.20
$1,678,239.52
-$4,776,030.68
45
$38,615.81
$511,184.04
$215,929.66
$6,926,838.43
$1,855,553.37
-$5,071,285.06
College
Total
% of HS
% of C-Cl
HS
Continous
Non-Continous
$1,441,044.39
$8,367,882.82
$3,296,597.76
100.00%
580.68%
228.76%
17.22%
100.00%
39.40%
What if the Interest Rate Goes
UP
High School Wage
College Wage
Yearly College Cost
Wage Growth Rate
Annual Interest Rate
College Return
$25,000
$40,000
$15,000
4.0%
10.0%
5.00%
College
Year
HS
Continous
Non-Continous
Cumulative
Difference
Con-HS
Ncon-Hs
Ncon-Con
41
$2,507.30
$27,507.20
$11,619.34
$776,708.11
$18,204.15
-$758,503.97
42
$2,370.54
$27,257.13
$11,513.71
$801,594.70
$27,347.31
-$774,247.39
43
$2,241.24
$27,009.34
$11,409.04
$826,362.80
$36,515.11
-$789,847.69
44
$2,118.99
$26,763.80
$11,305.32
$851,007.61
$45,701.44
-$805,306.17
45
$2,003.41
$26,520.49
$11,202.54
$875,524.69
$54,900.57
-$820,624.12
College
HS
Total
% of HS
% of C-Cl
Continous
Non-Continous
$423,607.59
$1,299,132.28
$478,508.16
100.00%
306.68%
112.96%
32.61%
100.00%
36.83%
What if the College Premium
Decreases
High School Wage
College Wage
Yearly College Cost
Wage Growth Rate
Annual Interest Rate
College Return
$25,000
$40,000
$15,000
4.0%
7.0%
2.00%
College
Year
HS
Continous
Non-Continous
Cumulative
Difference
Con-HS
Ncon-Hs
Ncon-Con
41
$7,790.62
$27,218.59
$15,198.72
$561,102.21
-$98,536.63
-$659,638.84
42
$7,572.19
$26,964.21
$15,056.67
$580,494.23
-$91,052.15
-$671,546.38
43
$7,359.89
$26,712.21
$14,915.96
$599,846.55
-$83,496.08
-$683,342.63
44
$7,153.54
$26,462.56
$14,776.55
$619,155.57
-$75,873.06
-$695,028.63
45
$6,952.97
$26,215.25
$14,638.46
$638,417.85
-$68,187.57
-$706,605.42
College
Total
% of HS
% of C-Cl
HS
Continous
Non-Continous
$650,630.41
$1,289,048.26
$582,442.84
100.00%
198.12%
89.52%
50.47%
100.00%
45.18%
How will this change if
• Time taking off from work increases?
• College Cost Increases?
• There is a college debt?