http:// progressive increase in educational levels of the population 1940: 60% elementary educated,...

http://www.dallasfed.org/fed/annual/2004/ar04.pdf

Progressive increase in educational levels of the population

1940: 60% Elementary Educated, 5% college educated

2004: 7% elementary educated, 25% college educated

Money Earnings (Mean) for Full-Time,

Year-Round Male Workers, 2003

Lifetime Sum of College vs High School Earnings

$593,000

Money Earnings (Mean) for

Full-Time, Year-Round Female Workers, 2003

Lifetime Sum of College vs High School Earnings

$415,000

Does this Mean College Pays for Itself?

College Enrollment and College Wage Premium

Based on Ehrenberg and Smith. 2006: Table 9.1, p. 286

College Enrollment and College Wage Premium

Based on Ehrenberg and Smith. 2006: Table 9.1, p. 286

6 point increase in wage premium raise male enrollment by 1 point

3 point increase in wage premium raise female enrollment by 1 point

Male Profile Female Profile

Stylized Facts Regarding Age Earnings Profiles

1) All profiles flatten with ageMost rapid wage growth early in career

2) Earnings increase with education

3) Earnings gap between education groups widens with age

4) Male female comparisons1) Female earnings lower than male earnings

2) Female wage profiles flatter than men

Note: These are synthetic cohorts—longitudinal data may differ especially for women

Factors affecting returns to college in the Human Capital Model

Ht = Earnings from High School Education in year t

St = Earnings from College Education in year t

Ct = College Tuition in year t

r = Rate of time preference

T = Time Span


PVS = 5 6 75 6 7

...(1 ) (1 ) (1 ) (1 )

TT

S S S S

r r r r

PVC = Present Value of College Costs

PVS = Present Value of College Salary

PVC = 3 3 51 1 2 2 4 42 3 4 5

...(1 ) (1 ) (1 ) (1 ) (1 ) (1 )

TT

H C HH C H C H C H

r r r r r r

Ht => decreases incentive to invest

St => increases incentive to invest

Ct => decreases incentive to invest

r => decreases incentive to invest

T => increases incentive to invest

NPV = 3 3 5 51 1 2 2 4 42 3 4 5

( ) ( )( ) ( ) ( ) ( )...

(1 ) (1 ) (1 ) (1 ) (1 ) (1 )T T

T

H C S HH C H C H C S H

r r r r r r


NPV: Net Present Value

Internal rate of return: the interest rate that sets NPV = 0

Measure of the returns to college

NPV = 3 3 5 51 1 2 2 4 42 3 4 5

( ) ( )( ) ( ) ( ) ( )...

(1 ) (1 ) (1 ) (1 ) (1 ) (1 )T T

T


r r r r r r


How does human capital investment model explain the pattern of age earnings profiles?

1) All profiles flatten with ageMost rapid wage growth early in career

Role of T in human capital investment

As age increases, incentive to invest falls


2) Earnings increase with education

S>H required for investment


3) Earnings gap between education groups widens with age

More educated get more firm-provided training

Sorting on r: More educated have lower r?


4) Male female comparisons1) Female earnings lower than male earnings

Discrimination?Role of discontinuous labor supply

Human capital decay affects occupational choiceAbsence decreases wages

Source: Anne Preston (2004) Leaving Science: Occupational Exit from Scientific Careers


2) Male female comparisons2) Female wage profiles flatter than men

Role of marital status in age earnings profiles


2) Male female comparisons2) Female wage profiles flatter than men

How have these changed over time

Women's Age/Earnings Profiles Getting Steeper

Occupational/Educational Choices getting more similar between men and women

How high do returns have to be for college to break even?

NPV = 3 3 5 51 1 2 2 4 42 3 4 5

( ) ( )( ) ( ) ( ) ( )...

(1 ) (1 ) (1 ) (1 ) (1 ) (1 )T T

T


r r r r r r

= 0 at breakeven

C = $5,000/year

H = 20,000/year for 44 years

r = 0.10

PV College cost = $79,250

Breakeven

S – H = $8,104 over 40 years

Total: $324,000

C = $15,000/year

H = 20,000/year for 44 years

r = 0.10

PV College cost = $110,950

Breakeven

S – H = $11,346 over 40 years

Total: $453,830

Diminishing returns to schooling

Why?

Diminishing returns to schooling

Why?

Opportunity cost

Direct cost

Marginal Product of time invested in schooling

Computing returns to schooling

ln(W) = β0 + β1 ED + β2 EXP + β3 EXP^2 + γZ + ε

β1 is a measure of the percentage returns to an additional year of schooling

Log Earnings Function

Alternative estimates of the returns to schooling as summarized in David Card, Handbook of Labor Economics Vol. 3A . 1999

Card, 1995 0.084

Card, 1999

Men 0.106

Women 0.110

Conneely and Uusitalo, 1997 0.114

Ashenfelter and Zimmerman, 1997 0.08 – 0.109

If individuals get returns to schooling, why should the public subsidize it?


Externalities: Benefits go to individuals other than the one receiving schooling

=>Individuals will underinvest relative to social optimum

Liquidity constraints: individuals cannot borrow against future expected returns

=>Poor will underinvest

Tuition and Fees23%

Federal Appropriations

2%

State Appropriations

28%Aux. Enterprises13%

Independent Oper.4%

Contracts and Grants24%

Other6%

http://www.public.iastate.edu/~inst_res_info/FB06files/finfac06.html

Iowa State University Revenue by Source, FY2005

http://www.public.iastate.edu/~inst_res_info/FB06files/finfac06.html

–––2000-2001––– –––2004-2005–––

DOLLARS % DOLLARS % GROWTHRevenues

State Appropriations 281,459 38.6% 236,156 28.5% -16.1% Federal Appropriations 10,802 1.5% 12,446 1.5% 15.2% Tuition and Fees 118,332 16.2% 193,547 23.4% 63.6% Contracts and Grants 139,990 19.2% 197,838 23.9% 41.3%

Auxiliary Enterprises1 103,649 14.2% 106,093 12.8% 2.4%

Independent Operations2 25,317 3.5% 29,075 3.5% 14.8%

Other3 48,716 6.7% 52,767 6.4% 8.3%

Total $728,265 $827,922

Revenues rose by 13.7% compared to 12.3% for inflation

Iowa State University Revenue by Source, FY2001 and FY2005

(Thousands of dollars)

1 Iowa State Center, Residence System, University Bookstore, Athletic Department.

2 Ames Laboratory.

3 Sales of educational activities and equipment, investment income

Source: What D'Ya Know? Lifetime Learning in Pursuit of the American Dream 2004 Annual Report—Federal Reserve Bank of Dallas

Higher Proportion Educated means higher per capita income, faster growth

Correlation or causation?

AGO

ALB

ARM

AZE

BDI

BEN

BFA

BGD

BOL

BRA

CAF

CIV

CMR

COL

COM

DOMEGY

ETHGABGHA

GIN

GMB

GNB

GTM

GUY

HTI

IDN

IND

KAZ

KEN

KGZ

KHM

LAO

LSO

MAR

MDA

MDG

MLI

MMR

MNG

MOZ

MRTMWI

NAM

NER

NGA

NIC

NPL

PAK

PAN PERPHL

PNG

RWA

SEN

SLE

SUR

SWZ

TCD

TGO

THA

TJK

TMP

TUR

TZA

UGAUZB

VEN

VNM

ZAF

ZARZMB

ZWE

-.2

-.1

0.1

.2.3

.4.5

.6D

iffe

ren

ce b

etw

ee

n m

ale

an

d f

em

ale

en

rollm

en

t in

urb

an

are

as

-.2 -.1 0 .1 .2 .3 .4 .5 .6Difference between male and female enrollment in rural areas

Gender Differences (by urban and rural) for ages 15-17

45o line: male = female

>0: Rural Male ed > Female ed

>0: Urban Male ed > Female ed

Higher enrollment

Quad 1: Males

Quad 2: Urban male, Rural Females

Quad 3: Females

Quad 4: Rural Males, Urban Females

III

III IV

Male and Female Enrollment Rates, Ages 15-17, 70 Developing countries


Are externalities bigger for women?

Fertility

Health

http:// progressive increase in educational levels of the population 1940: 60% elementary educated,...

Documents