Question

Question 3:

A) Why is education level such a strong variable in a typical worker’s human capital earnings function and the age–earnings profile? How might the human capital investment (the dominant) view contrast to the screening, signaling and ability hypotheses (to explain the connection of education to earnings)?

B) What is the "college/high school earnings premium"? How has this altered the human capital investment decision of individuals who are weighing the potential, long-run benefits vs. costs of higher education? How might it alter a college student's choice to work (or not) at a paid job WHILE they are enrolled in college (classes)?

C) Which side has more incentive to make the often costly, up-front investments in firm-specific vs. industry-specific vs. general training? Why? Provide a concrete example of each type of training.

Answer 1

Part(A). Education plays a vital role in a worker's human capital earning's as there is more demand for high-skilled labor as compared to low-skilled labor. This is because automation and machines are replacing jobs that involve routine tasks. It is also reflected in the kind of goods a nation produces. A developed economy with more industrialisation and production of knowledge-intensive goods and services, would require a competent labor force that is able to keep up with the constantly changing technologies and methods of development.

Part(B). College or high school earnings premium refers to the wage rates that a college or a high school graduate is able to secure due to his educational qualifications. This has led to a rise in the number of enrollments at the college level as the pay grade in most firms is directly proportional to the educational achievements. The cost of education is considered by most as an investment because it results in higher earning potential. A college student would decide whether to work or not while he/she is enrolled in college depending on his/her financial background and commitments . The ability to keep up with class studies is another factor. Usually, college students would not mind working to handle their expenses.

Part(C). Firm specific investments would be less valuable when compared to industry specific. While general training in some sectors would be more valuable than industry or firm specific training. This is because studies have shown that firm specific signalling indicates lack of commitment and organizational skills. This is because firm specific skills are less or not valuable outside their chosen firms. The same goes for industries but it is in a much better position than firm specific interests as one could move to different industries. But the most valuable would be general training and skills as it includes a wide set of capabilities and is not restricted to a certain domain.

Example of firm specific skill would be -- dot net programming skills (Microsoft). This would restrict the movement of the individual to other industries such as Apple or any other software company.

example of Industry specific skill would be-- Mechanical engineering. An individual cannot move to other areas of engineering.

Example of general training would be-- A combination of several skills incorporated into one module. A simple example would be technical writing. Where a person is competent enough to understand technologies while at the same time translating it in a format a layman could understand. Another example would be production management.