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1、Human capital theory i. Knowledge, ability and skills obtained through a persons “investment” in acquiring them are called human capital (HC). Human capital theory in modern economics is pioneered by T. Shultz and G. Becker, both became Nobel Prize laureates partly because of their contributions to
2、HC. HC theory is the cornerstone of modern economics. The theory is used to explain many labor market phenomena. The costs of investment in HC are in the forms of a) direct monetary expenses; b) forgone earnings or “opportunity cost”; and c) psychic losses because learning is often difficult and ted
3、ious. Like any investment, investment in HC is for a future return, in the form of higher future earnings. In classic HC theory, an individuals HC investment decision is based on a cost-benefit analysis like in any investment decision. Gross benefits Earning A A Lost income pay-age of worker ments B
4、ii. Determining the optimal level of investment Present value = B1/(1+r) + B2/(1+r)2 + BT/(1+r)T This present value is compared with the current marginal cost to determine if an additional unit of expenditure is worthwhile. Internal rate of return method. Use the same formula as above. Ask the quest
5、ion “how large could the discount rate be and still render the investment profitable?” Example of valuing human assets: E&S, p.315.iii. Implications of the theory Those who dislike schools will invest less in HC. Those who have fewer opportunities will invest less. MC MC MB Younger people are more l
6、ikely to attend college. Present-oriented people are less likely to go to college than forward-looking people (e.g., there are people for them current income is more important). College attendance will decrease if the costs of college rise. College attendance will decrease if income difference betwe
7、en college and HS graduates narrows. Those who bear the primary responsibilities for child bearing and raising (historically women) are less likely to seek as much education. But, as the number of children decreases, women will seek more education.General vs. Firm-Specific Human Capital1. Introducti
8、on.i. Definitions G vs. SHCl Conceptual definitions (general HC, firm SHC, and Industry SHC.)l Are they practically separable?ii. Implicationsl Firms are not willing to invest in workers GHC.l Labor turnover is adversely affected by investment in SHC. Mincer & Jovanovic (1981) report data that the a
9、nnual separation rate drops by 90% from the first year to the 6th year with the firm.l GHC has no effect on labor turnover. 2. SHC investment and matching/turnover (Parsons. 1986, in the spirit of Mortensen 1978; Hashimoto and Yu, 1979; and Harshimoto, 1981.)i. Assumptionsl The worker and the firm m
10、ust undertake an investment (in SHC, or “organizational capital”) if the worker is to be an efficient employee. Investment cost is c. l After the investment, the workers productivity in the firm and that in the labor market are subject to random shocks. The former may be due to a reversal of demand
11、for the firms product. The latter may be due to some structure in the economy. (Comment: two shocks are not necessary. It is the relative values of the workers productivity in and outside of the firm that matters.) l The workers realized productivity is thusVi = i + i, i = 0, 1 (w/ investment)Vi = 0
12、, (w/o investment)0: workers expected productivity at the firm. 1: workers expected productivity at another employment0: A random variable, shock to productivity at the employment1: A random variable, shock to productivity at other employmentE() = 0l The firm maximizes profit and the worker income.
13、ii. Results.l 0 1 has to be greater than the cost to make investment in the worker profitable on average, 0 1 c.l Efficient separation occurs when V0 V1 0 + 0 1 + 1, or m = o - 1 1 - 0 1 m 0(-m, 0) (0, 0)l Separation is less if 1 & 0 are positively correlated. There is no separation if they are perf
14、ectly and positively correlated.l If 1 & 0 are independent, increased variance in either of them will increase the probability of separation.l Since separation is efficient, distinction between layoffs & quits is not necessary and meaningful.iii. Information requirement in sharing the gain l Defining factor payments w = V1 + (V0 V1)= V1 + m + (0 1)and = V0 w= (1 - )(V0 V1)= (1 )m + (1 )(0 1)where 0 c, but m c, and (1 )m c, then neither the worker nor the firm would make the investment. The two sides will have to share the cost of investment. l Under this sharing rule, separat
