Summary Chapter 3 Lazear and Gibbs

SUMMARY – CHAPTER 3 LAZEAR & GIBBS

INVESTMENTS IN SKILLS

Human capital theory: education and training are seen as investment which can be modelled just like any other investment.

INVESTMENT IN EDUCATION

How to decide if it is worthy to invest (more) in education: NPV analysis.

Where:

If NPV is positive, then it is convenient to choose the education.

Early years of schooling: the returns always exceed the costs. This is first because when an individual knows very little, there is much that could be learned. Secondly, because in the early years of schooling the costs Co are very low (thanks to public subsidies).

Very high degree: the inverse happens. For example if you want to take a PhD course you know that generally won’t increase much your future earnings (which could already be high).

each individual must search the optimal stopping point (when the NPV switches from positive to negative).

Implications of the equation (in practice):

Costs: if they increase, the enrolment decreases. If economy is in recession, more individuals choose to study (especially MBA), because education is a better investment when your labour market opportunities are weaker.

Interest Rates: the higher the interest rate s, the more that future earnings are discounted from today’s point of view. But they don’t have a big effect, because schooling is a long time investment and long terms rate are generally less volatile than short term one.

Career length: the longer the working life of an individual is, the longer is the opportunity to cover costs with benefits. Women tend to invest less in schooling because they have a shorter working life (due to fertility).

Specialization: if education is as any other investment than it has to have diminishing returns. But with education the story is different, because if we specialize in something we can become vital for other people and we can trade our skills with other people. Therefore in education the more...