Education
Which are the benefits of getting education for workers?
Higher wages
Higher amenities
Better health and relationships
Happier
Countries with more educated workers are more productive
How do people choose their level of education according to the human capital model?
When the marginal rate of returns to schooling is equal to the discount rate, which is the MC of education
How can we know how much firms are willing to pay workers for each level of education?
With the wage schooling locus, that traces out the salary employers are willing to pay for each level of schooling. It is concave and upwards slopping
Why do different people choose different levels of education according to the human capital model?
Differences in discount rates -> time preferences and financial resources
Present bias
Differences in MRRS -> ability -> shifts up wage-schooling locus
Assuming that all workers have the same wage-schooling locus, what would be the welfare consequences for the individuals of mandating and enabling another year of schooling on those that would have otherwise dropped out due to high discount rates?
Depends on what causes high dicount rates:
If it is financial resources -> welfare enhancing, because now their optimal stopping pint lets them get more years of education increasing their wages
If it is time preferences -> welfare detrimental, because some people would not be stopping education at their optimal point
If it is present bias -> depends on how we interpret present bias: if it is a reflection of true preferences, welfare detrimental, if it is time inconsistency, welfare enhancing
What is ability bias? How can it be overcomed?
The fact that more able subjects are also more likely to get more education, so if we don't account for that we will overestimate the returns of education.
We can overcome it by using detailed datasets that include records of early cognitive ability or use endogenous variations independent of ability
How can we empirically estimate the returns of education?
With the mincer equation, that regresses log wages onto schooling and experience (also squared to capture the curvature of the age-earnings profile)
Which assumptions does the mincer equation make?
Education and experience are separable
Schooling has a linnear impact on wages
The error term is independent from education and experience
Which are the limitations of the mincer equation?
It suffers from 2 sources of endogeneity: omitted variables and selection bias.
Ability bias affects both sources: individuals with better unobservables benefit more from education and individuals with better unobservables are more likely to get education.
There is additional selection bias because people participating in the LM is not a random sample of the general population.
How does uncertainty affect schooling decision?
When expectations are not rational (not zero mean error term) individuals can make wrong decisions
When there is risk aversion: preference for a certain over a risky outcome, even if the risky one is better in expectation
Which are the most important assumptions of the signalling model for chosing education?
Productivity is immutable over lifetime
Asymmetric information: firms annot know how productive each worker is