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ECONOMICS OF EDUCATION

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ECONOMICS OF EDUCATION

Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,

Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest

Institute of Economics, Hungarian Academy of Sciences

Balassi Kiadó, Budapest

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ECONOMICS OF EDUCATION

Author: Júlia Varga

Supervised by Júlia Varga June 2011

ELTE Faculty of Social Sciences, Department of Economics

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ECONOMICS OF EDUCATION

Week 2

Human capital

Investment decisions by firms

Júlia Varga

(6)

Marginal productivity of trainees increases:

in all (many) firms → general training

only in the firm providing the training → specific training

Types of on the job training

(7)

MP t = W t

‘n’ number of periods the trainee meant to be employed in the firm

training period: initial (0) period, non-training periods: n–1

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Returns to firm training labour

Costs to firm training labour

    

  1

1 0

1

1

0 ( 1 ) ( 1 )

n

t

t t n

t

t t

i k W

i W MP MP

k = direct costs of training

On the job training

(9)

i G W

n MP

t

t t

t

 1

1 ( 1 )

MP 0 + G = W 0 + k

   

 

1

1 0

1

1

0

( 1 ) ( 1 )

n

t

t t n

t

t t

i k W

i W MP MP

On the job training

(10)

MP 0 + G = W 0 + k

Indirect costs of training: the difference between what could have been produced MP’

0

and what is produced (MP

0

):

MP

0

- MP’

0

MP’ 0 + G = W 0 + C

C = k+ (MP 0 ’ - MP 0 )

On the job training

(11)

i G W

n

MP

t

t t

t

 1

1

( 1 )

MP’ 0 + G = W 0 + C

G=0 

General training

(12)

MP 0 ’ = W 0 + C,

MP 0 ’ =(MP 0 ’ – MP 0 ) + k W 0 = MP 0 - k

Employees pay for general training by receiving wages below their (opportunity) productivity by the total cost of training.

General training

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General training – firms could not capture any of the return

MP, W

Training period Post-training period

MP’

0

MP

0

MP

t

= W

t

Costs

Benefits

Time

(14)

Age

training raises future earnings capacity of the individual

W

Earnings without

on the job training

Potential earnings Actual earnings

É*

General training – employees pay for

general on the job training

(15)

Marginal productivity of the employee:

• without on the job training: MP 0

• after training, in the firm providing training: MP t k

• after training, in other firms: MP 0

• during training: MP 0 k < MP 0

Firm – specific training

(16)

Specific training

MP,W

Training period Post-training period

MP0 = wage of the worker in other firms

MP

0k

MP

tk

Individuals do not pay for specific training.

They receive no benefits from it, as there is no competitive pressure to ensure wages rise along with their MP

Time

(17)

Specific training

MP,W

Training period Post-training period

MP

0

= wage of the worker in other firms

MP

0k

MP

tk

If the worker quit to take another job the firm cannot collect return

Time

(18)

Specific training

MP,W

Training period Post-training period

MP

0

= wage of the worker in other firms

MP

0k

MP

tk

Firms share training costs and returns with employees taking account the possibility of employees’ turnover.

Rational firms pay specifically trained employees a higher wage than they could get elsewhere

W

0

W

t

Time

(19)

A decline in MP will reduce employment for those whose real wage = MP’ initially, but will not necessarily reduce employment for those whose real wage < MP’ initially W,MP

W,MP

Employment

W

1

=MP

1

General training

E

1

E”

MP’’ MP’

Employment

W

1

MP

1

E

Specific training

MP’

MP’’

The effect of a decline in demand on employment

with general and specific training

Hivatkozások

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