commenting on Educating Oligarchs

This assignment asks you to write two pages commenting on Educating Oligarchs written by Greg Mankiw ( Your comment should discuss how the material you have been learning in this course illuminates your understanding of the blog post. Your comment should summarize in some sentences the Educating Oligarchs main argument.

Some materials you have been learning in this course:
Investments in Human Capital: Education and Training
– Many labor supply choices require a substantial initial investment on the part of the worker that one hopes to recoup over some period of time, thus current wages and working conditions are not the only deciding factors and modeling these decisions requires developing a framework that incorporates investment behavior and a lifetime perspective
– Economist refer to the knowledge and skills of a economy s workers as their human capital and this capital is rented out to employers
– The knowledge and skills a worker has “ which come from education and training, including the learning that experience yields “ generates a certain stock of productive capital; the value of this productive capital is derived from how much these skills can earn in the labor market.
– Human capital includes accumulated investments in such activities as education, 0n-the-job training, and migration, whereas nonhuman capital includes society s stock of natural resources, buildings, and machinery.
– Investments in knowledge and skills of workers takes place in three stages
1) Early childhood when most acquisition in determined by others; parental resources and guidance, the cultural environment, and early schooling experiences help to determine basic language and mathematical skills, attitudes towards learning, and general health and life expectancy
2) Teenagers and young adults go through a stage in which they acquire knowledge and skills as full time students in high school, college, or vocation training programs
3) After entering the labor market, workers additions to their human capital generally take place on a part time basis, through on-the-job training, night school, or formal or informal training programs
– Individuals decisions about investing in human capital are affected by the ease and speed with which they learn, their aspirations and expectations about the future, and their access to financial resources
Human Capital Investments: The Basic Model
– An investment in human capital entails costs that are borne in the near term with the expectation that benefits will accrue in the future; these costs can be divided into three categories:
1) Out-of-pocket or direct expenses such as tuition, books, and other supplies
2) Forgone earnings that arise because during the investment period, it is usually impossible to work, at least not full time
3) Psychic costs that occur because learning is often difficult or tedious or at least more so than pure leisure
– In the case of educational and training investments made by workers, the expected returns are in the form of higher future earnings, increased job satisfaction, and a greater appreciation of nonmarket activities and interests; even if we could quantify all the future benefits summing them over the relevant time is not a straight forward procedure because of the delay involved in receiving the returns to the investment
– When the decision is made to invest in human capital, the investor commits a current outlay of expenses in return for a stream of expected future benefits; investment returns are clearly subject to an element of risk and with human capital they are delayed in the sense that they are received on a very long period of time; the investor needs to compare the value of the current investment outlays with the present value of the expected returns but in doing so, must take into account effects of the delay in returns; the present value of an investment is given by

Present Value = RnY1/(1 + r) + RnY2/(1 + r)2 + RnY3/(1 + r)3 + . . . + RnYT/(1 + r)T
Where RnY is the return in a given year, r is the individual s discount rate (usually assumed to be the real interest rate), and T is the last year the return will be received (death or retirement age)
– Transforming future value into present value is referred to as discounting
– Our model of human investment assumes that people are utility maximizers and take a lifetime perspective when making choices about education and training; They are therefore assumed to compare the near-term investment costs, C, with the present value of expected future benefits when making a decision about investing in more human capital; Investment in additional schooling is only attractive if the present value of future benefits exceeds costs

RnY1/ (1 + r) + RnY2/ (1 + r)2 + RnY3/ (1 + r)3 + . . . + RnYT/ (1 + r) T > C

– Utility maximization requires that people continue to make additional investments in human capital so long as the cost of these investments is less than or equal to the expected benefits of the investments
– When using the present value method, we can specify a value for the discount rate, r, and then determine how the present value of benefits compares to the costs
– Alternatively, we can use the internal rate of return method which asks how large the discount rate could be and still render the investment profitable; if the benefits are so large that even a very high discount rate would render the investment profitable, then the project is worthwhile; in practice, this is done by setting the present value of benefits equal to the costs, solving for r, and compare this rate of return to that of other investments
– We will assume that the marginal costs of each additional unit of human capital are constant and that the present value of the marginal benefits of additional human capital are declining because each additional year of schooling means fewer years over which the benefits can be collected, and utility maximization will occur when marginal costs are equal to marginal benefits
– For those whom learning is more arduous, marginal costs will be higher and they will accumulate less human capital; for those who expect to receive smaller future returns will also invest in less human capital
The Demand for a College Education
– The demand for a college education is impacted by the expected returns to the increased investment in human capital; while there are consumption benefits to college (enjoying the courses and the college lifestyle) these are considered relatively constant across time
– A person considering college has essentially two choices of lifetime earnings
1) A stream of earnings that begins immediately but does not rise very high
2) A negative income until graduation, followed by a period when the salary may be less than the high school graduate but then increases rapidly and rises above the income of the high school graduate
– For anyone to invest in a college education, the gross benefits, the difference between the two choices must be much greater than the costs because earnings in the future are discounted
– While few students can or will precisely estimate the lifetime earnings relative to costs for the two choices, so long as the decision takes into account the same factors, four predictions concerning the demand for college can be made:
1) Present-oriented people are less-likely to go to college than forward looking people
2) Most college students will be young
3) College attendance will decrease if the costs of college rise
4) College attendance will increase if the gap between the earnings of college students and high school graduates widens
– People who heavily discount the future (for whom r is large) are called present-oriented; as r increases the present value of future earnings decreases; however it is very difficult (if not impossible) to quantify the value of r an individual uses to discount the future, though those who invest more in education are more likely to exhibit other forms of forward-looking behavior
– There is a strong correlation between education and health that cannot be attributed to better use of medical resources (choosing better doctors) and likely lies with forward looking habits of those who invest in education and those who invest in healthier life-styles
– Given similar yearly benefits of going to college, young people have a larger present value of total benefits than older workers simply because they have a longer remaining work life ahead of them; thus we expect younger people to have a greater propensity than older people to obtain a college education or engage in other forms of training
– Human capital investments are also greater when the costs are lower; if foregone earnings, out-of-pocket costs, or psychic costs fall, we would expect college enrollment to increase
– However, individuals vary in their access to funds to pay for college; for some college is paid for by the generosity of others (parents or scholarships), while others must take out loans, and others must work to get the money; this results in significantly different costs of attending college; attempts to reduce the costs of college through subsidized loans and publicly funded universities have been very successful in increasing college enrollment
– The increased opportunity costs of attending college also explains why older workers are less likely to invest in college than younger individuals; older individuals likely have higher (potential) earnings than younger individuals and thus would be sacrificing more earnings when deciding to pursue education, especially if they enrolled full time
– Psychic costs also play in the decision to go to college; people with a greater aptitude for the kind of learning college demands are more likely to attend; this can be impacted by family background, peer effects, and other forms of early life socialization
– The demand for education is also positively associated with expected lifetime earnings, though there is great uncertainty regarding these returns; while it is important to know the average earnings differentials between college and high school graduates, there is a growing spread between the most successful college graduates and the least successful ones, where individuals in the latter group may be deterred from making an investment in college; peer effects caused by friends, ethnic affiliation, neighborhoods, and role model are also influential in affecting the psychic costs of education by impacting the uncertainty that surrounds estimates of future success in specific areas
– Returns to education are determined by forces of both employer demand and employee supply; if college graduation rates increase, this will put downward pressure on the wage differential between high school graduates and college graduates for two reasons
1) The increased supply of college graduates puts downward pressure on their wages
2) The decreased supply of high school graduates puts upward pressure on their wages
– Adding to the uncertainty about expected payoffs to an investment in college is the fact that current returns may be an unreliable estimate of future returns; high wage differentials today may cause an influx of college students which will put downward pressure on the wage differentials when these students graduate in four years
Education, Earnings, and Post-Schooling Investments in Human Capital
– Investments in human capital are not limited to investments in formal schooling; on-the-job training is another important factor in the accumulation of human capital even though it is more difficult to observe than formal schooling
– Examining the age/earnings profile for both men and women, we observe four notable characteristics:
1) Average earnings of full time workers rise with education
2) There is a rapid increase in earnings that occurs early, giving a concave shape to the age/earnings profile
3) Age/earnings profiles tend to fan out, so that education related earnings differences later in life are greater than those early on
4) Age/earnings profiles of men tend to be more concave and fan out more than those of women
– The investment model of educational choices implies that earnings rise with the level of education; if they did not there would be no incentive to invest in education (unless the consumption benefits of college are greater than the foregone earnings of full time employment)
– On-the-job training can occur through learning-by-doing (skills improving through practice), formal training programs, or informal mentorships from more experienced workers; all forms entail reduced productivity for the trainees during the learning process, and both formal and informal also involve a commitment of time by trainers or mentors
– From the perspective of employees, training depresses wages during the learning period but allows wages to rise with enhanced productivity afterward; workers who opt for jobs that require a training investment are willing to accept lower wages in the short run to get higher pay later on; returns are greater when the post-investment period is longer (more time to receive returns), so we would expect investments in on-the-job training to be greater at a young age and decrease as they grow older
– Without further training, an individual receives a given wage once full time education has been completed, for simplicity we will assume this is constant; if the worker invests in on-the-job training, their potential earnings are increased; but these investments have the near-term consequence of actual earnings being below potential earnings because of the investment costs; the gap between potential earnings and actual earnings measures this investment cost
– To reflect the theoretical implications that investment decrease with age, the gap between potential and actual earnings decreases with age; also as workers become less willing to invest in human capital as the age, the yearly increase in both potential and actual earnings decreases
– Initial wages for the individual that invests in on-the-job training are lower than that of the individual that does not because of investment costs; however, as wages rise for the training individual, this person s wage will eventually over take those of the non-trained individual; the age this occurs is referred to as the overtaking age and has some interesting empirical implications
– We can observe someone s educational level relatively easily but not their potential wage, so when we use statistics to analyze earnings, the correlation is greatest at the overtaking age, earnings here will be the same for the individual that invests in on-the-job training and the one that does not, before and after there is a difference that skews the correlation; education and earnings levels correlate most strongly at about 10 years after labor market entry which offers support for the human capital explanation of age/earnings profiles based on job training
– Earnings differences across workers with different educational backgrounds tend to become more pronounced as they age, which is consistent with the human capital theory
– Investments in human capital tend to be more likely when the expected earnings differentials are greater, initial investment costs are lower, and the time to recoup the investment is longer; for people who learn more quickly there is an increased time to recoup costs and likely lower psychic costs associated with training
– So people who learn quickly will likely seek and be given training opportunities; these are the people who also likely sought out more formal schooling so those with higher levels of education are also more likely to invest in on-the-job training
– So these individuals will have age/earnings profiles that start low because of investment costs but will rise quickly and keep rising as their less-educated counterparts earnings level off; wages rise quickly because of the investments in on-the-job training and continue to rise as investments in on-the-job training continue
– Women who work full time year round have earnings lower than for men of equivalent age and education, and their wages rise less steeply with age
– Historically, a major difference in the investments in human capital between men and women could be explained by the amount of time over which the investment could be recouped; women may have participated in the work force for a short period of time before leaving to take care of the family the returning years later; while wages for women have been rising rapidly and human capital investments are more lucrative women are still less likely to work full time than men
– While women on average still receive less on-the-job training than men, this gap is narrowing; the explanation that on-the-job training causes concavity in the age/earnings profile may help explain why this profile tends to be flatter for women (less on-the-job training); as this gap in training diminishes greater concavity should be observed; this can be seen when comparing age/earnings profiles across time;
– As wages for women have increased, so have incentives to invest in formal schooling and this is reflected in the fact that women now account for more than half of the bachelor s, master s, and doctoral graduates; this has also been accomplished by a shift in the majors women pursue specifically in to, business, law, and medicine, though not significantly into computer science and engineering
Is Education a Good Investment?
– The question whether more education would be a good investment is one that concerns individuals and policymakers; individuals want to know whether the increase in monetary and psychic income is sufficient to justify the costs of additional education; policymakers must decide whether the expected social benefits of enhanced productivity outweigh the opportunity costs of investing more social resources in the education sector
– Several studies have looked at the monetary gains associated with education for the individual; this method general compares earning differentials using a methodology similar to the age/earnings profile controlling for factors such as age, race, gender, health status, union membership, and location
– One problem with this methodology is that many forms of ability (intelligence, work ethic, patience, etc.) are associated both with educational attainment and productivity but are not easily observable; people who are smarter, harder working, and more dynamic are more likely to obtain more schooling and, independent of educational attainment, are more likely to have higher productivity in the work place increasing their wage rate; when these characteristics are not included in the estimation process (which may be impossible to do, how do you measure work ethic?) then the returns to education are biased upwards because this return includes some returns that should be attributed to ability rather than education; this is called ability bias
– The psychic costs of education and an individual s discount rate are also unobservable variables that affect the decisions about education investment; a sample of individuals will include those with relatively low and relatively high psychic costs and discount rates; this creates a problem because people who are observably similar will have different levels of education because one likes school less or discounts the future more (we expect people who are observably similar to make similar decisions); compulsory school attendance and the randomness of birthdays may force some individuals to obtain more education than others regardless of psychic costs and discounts which may affect returns to education (can drop out at 16, some may be able to drop out after sophomore year, others may need to wait until end of junior year); a high psychic cost or high discount rate will bias estimates of returns to education downward because these will generally reduce the level of education even though all other observables may be similar; this is called the selection bias
Is Education a Good Social Investment?
– The issue of education as a social investment has been of heightened interest in the United States in recent years, especially because of three related developments
1) Product markets have become more global, increasing the elasticity of both product and labor markets; American workers are facing more global competition from workers in other countries
2) The growing availability of high-technology capital has created new products and production systems that may require workers to have greater cognitive skills and to be more adaptable, efficient learners
3) American elementary and secondary school students have scored relatively poorly on achievements tests in mathematics, reading proficiency, science, and problem-solving
– These have raised questions concerning the productivity of America s future labor force, relative to workers elsewhere, and led to concerns about our education system
– Even though America spend more per student relative to other developed nations, poor performance on proficiency tests has led too concerns that we may be devoting too many or too few resources to education, and whether these resources are used wisely; these estimates do not include the foregone earnings of individuals who pursue education which increases the social costs to approximately ten percent of GDP
– Investments in education are presumed to increase productivity as we observe those who have higher education levels being more productive in the workforce; therefore education would increase the stock of society s human capital by increasing the individual s stock of human capital; there may also be spillover, or positive externalities, that result from one person s investment in education that cause others to be more productive (improve returns to cooperation or increased productivity from creative problem solving); this creates additional, positive benefits to society that are greater than the benefits to the individual
– However, education may just function as a signal of your predetermined ability (education may only reflect an individual s low psychic costs, intelligence, work ethic, and other characteristics that make them productive); the employer cannot observe an individual s actual or potential level of productivity, but they can observe characteristics that are correlated with productivity such as age, experience, education, and other personal characteristics; while an individual has no control over their age, education and other characteristics can be acquired, and these acquired characteristics are called signals
– Suppose there are two equally large groups of applicants for a job, high productivity and low productivity workers; high productivity workers are worth $40,000 a year, where low productivity workers are worth $20,000 a year; without knowing what kind of employee they are going to hire (high or low productivity) the firm will offer $30,000 a year; overtime the firm may find out which workers are high productivity and low productivity and move them into jobs that pay accordingly, in the interim they are underpaying high productivity workers and over paying low productivity workers; education can function as a signal of one s productivity even if education does nothing to increase an individual s level of productivity
– If the costs of schooling are negatively related to an individual s on-the-job productivity, then education can be used as a signal of productivity; if education increased wages and were costless, everyone would obtain more education, however, these costs are large, and the psychic costs of education are likely inversely related to ability (high psychic costs means lower levels of productivity) and thus those who learn easily can acquire the educational signal more cheaply; if those who have lower costs of acquiring education are also more productive, then requiring education signals can be useful for employers
– If higher costs are associated with lower cognitive ability then education can function as a signal; however, if higher costs are associated with lesser access to funds, then signaling fails because it only reflects low family wealth and not productivity
– Signals can also be unnecessarily costly; increasing educational requirements may continue to segregate low productivity and high productivity workers, but only at a higher individual and societal cost
– If education does nothing to improve productivity, does society gain anything by investing in education?
– College graduates earn more than individuals who drop out of college, supporting a signaling hypothesis, though this may reflect the fact that returns to education increase with each additional year of college
– Returns to education also increase with age/experience, if education were only a signal, then it would only increase initial wage (human capital argument), proponents of signaling counter that because the spread increases, signaling obviously worked to identify the most productive workers
– If schooling only signals ability then investments in the educational system are not necessarily the best way to remedy low cognitive achievement; if schooling can enhance productivity, then increased investments in schools is warranted; proponents of signaling point to mounting evidence that there is little correlation between school expenditures and results on cognitive tests; proponents of human capital point to evidence that shows students that attend higher quality schools (schools that have access to more resources) earn more; while earning may be higher for students who attend higher quality schools, that does not mean these schools have improved cognitive abilities; better schools may improve creative thinking skills as well as develop better work habits; they also may give students a better idea about where the student s strength lie improving employee-job matches; they may also have better resources to networks that allow improved student-firm pairings
– This debate may be moot because firms are willing to pay more for education, so the firm must see that education provides some service that they cannot perform more cheaply, so education must either increase productivity or be a less expensive screening tool for the firm; in either case, education provides a social benefit
Is Public Sector Training a Good Social Investment?
– The federal government has funded numerous programs targeted towards the disadvantaged; some provide job search help while others provide training or work experience, and others provide services associated with living away from home; evaluating these programs requires comparing the costs of the program to the benefits that are returned; Costs must take into account not only the money spent by the government and others but also the foregone earnings during the training period; benefits must take into account increased wages over an extended period of time that are discounted appropriately; most studies have shown that the training programs are only cost beneficial for adult women, with total costs of approximately $7,500 to $11,500 and 20 year returns of approximately $28,500 for adult women

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