ECONOMICS OF EDUCATION
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
ECONOMICS OF EDUCATION
Author: Júlia Varga
Supervised by Júlia Varga June 2011
ELTE Faculty of Social Sciences, Department of Economics
ECONOMICS OF EDUCATION
Week 2
Human capital
Investment decisions by firms
Júlia Varga
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
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
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
i G W
n MP
t
t t
t
1
1 ( 1 )
MP 0 + G = W 0 + k
11 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
MP 0 + G = W 0 + k
Indirect costs of training: the difference between what could have been produced MP’
0and what is produced (MP
0):
MP
0- MP’
0MP’ 0 + G = W 0 + C
C = k+ (MP 0 ’ - MP 0 )
On the job training
i G W
n
MP
t
t t
t
1
1
( 1 )
MP’ 0 + G = W 0 + C
G=0
General training
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
General training – firms could not capture any of the return
MP, W
Training period Post-training period
MP’
0MP
0MP
t= W
tCosts
Benefits
Time
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
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
Specific training
MP,W
Training period Post-training period
MP0 = wage of the worker in other firms
MP
0kMP
tkIndividuals 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
Specific training
MP,W
Training period Post-training period
MP
0= wage of the worker in other firms
MP
0kMP
tkIf the worker quit to take another job the firm cannot collect return
Time
Specific training
MP,W
Training period Post-training period
MP
0= wage of the worker in other firms
MP
0kMP
tkFirms 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
0W
tTime
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
1General training
E
1E”
MP’’ MP’
Employment
W
1MP
1E
Specific training