• <b>United States Federal Reserve</b>

Intermediate Microeconomics

5. Human Capital

In competitive labor markets, workers in the labor market are paid a uniform wage rate. In reality, this is not the case: different workers are paid different wages. The theory of compensating wage differtials posits that different wages result because jobs differ in their amenities. By contrast, the human capital model of wage determination contends that wages differ across workers because of differences in skill level. Much of a person's human capital is acquired through schooling or job training. It is important to understand why some individuals drop out of high school, graduate from high school, go to college or obtain graduate-level degrees. In addition, a critical question for public policy is whether public investment in schooling is a good idea, as public policy takes an active role in setting human capital policy. In the Pencasts for this topic, we develop the schooling model, demonstrate how differences in ability can give rise to earnings differences not attributable to schooling, examine an alternative theoretical framework in which education serves as a signal rather than an investment that augments productivity, and examine general and specific on-the-job training.

[Download PDF]

Education as an Investment

This Pencast discusses the idea that education is an investment in which one must account for expenditures incurred and returns received at different time periods. The concept of present value is discussed. [Play Pencast]

[Download PDF]

Schooling Model: Basics

This Pencast describes the schooling model, including the basic idea behind the model and its assumptions. [Play Pencast]

[Download PDF]

Schooling Model: Present Value

This Pencast illustrates how to use present-value calculations to determine whether going to college or entering the work force is optimal. [Play Pencast]

[Download PDF]

Wage-Schooling Locus

This Pencast illustrates the wage-schooling locus, which relates earnings to years of schooling. We demonstrate how to compute the marginal rate of return to schooling by using the information provided by the wage-schooling locus. [Play Pencast]

[Download PDF]

Marginal Rate of Return to Schooling

This Pencast illustrates the optimal stopping rule for choosing one's level of educational attainment. The stopping rule is based on the marginal rate of return to schooling and the individual's discount rate. [Play Pencast]

[Download PDF]

Ability Bias

This Pencast demonstrates how differences in ability give rise to differences in earnings, not attributable to differences in educational attainment. [Play Pencast]

[Download PDF]

Education as a Signal: Part I

This Pencast presents a model that treats education as a signal; that is, an individual's educational attainment signals unobservables, such as innate ability, to employers. [Play Pencast]

[Download PDF]

Education as a Signal: Part II

This Pencast illustrates how educational attainment can generate a separating equilibrium in which high-productivity workers signal their ability by obtaining more education than low-productivity workers. [Play Pencast]

[Download PDF]

On-the-Job Training: Part I

This Pencast discusses general versus specific training. We also provide the profit maximizing conditions with and without training. [Play Pencast]

[Download PDF]

On-the-Job Training: Part II

This Pencast discusses general training and whether firms or workers "pay" for the cost of the training. It is demonstrated that firms would not pay for general training, which is transferable to other firms. [Play Pencast]

[Download PDF]

On-the-Job Training: Part III

This Pencast discusses specific training. It is demonstrated that firms and employees share the costs of specific training, as it is important for both to have a stake in the training to ensure the job will continue to be provided following the training and that the employee will continue working with the firm in the post-training period. [Play Pencast]

Return to Intermediate Microeconomics Home