Poor - 2

Front 1

What is Human capital?

Back 1

the complete set of knowledge and skills of a worker that are associated with increased productivity

Front 2

Types of Skills and Knowledge that Contribute to Human Capital?

Back 2

Formal education and training • On the job training • Apprenticeships • On the job learning
• Soft skills (perseverance, sociability, hustle, promptness, ect.)

Front 3

Present value?

Back 3

the present value of a future amount of money is the amount that, if invested today, would grow to be as large as that future amount when the interest that it will earn is taken into account.

Hint 3

Future Value = FV = (Present Value) ⋅ (1 + r)

Front 4

How much is $110 for the next three years (this year, next year, and the year after) worth today?

Back 4

see slide

Front 5

How is getting a college education is a substantial investment?

Back 5

– The average annual net cost of public 4-year colleges is $12,000 per year (tuition, fees, room and board)
– The average annual net cost of a private 4-year college is $23,000 per year (tuition, fees, room and board)
– On top of tuition, fees, room and board there are foregone earnings

Front 6

How does the investment decision involves the comparison between different lifetime earnings profiles?

Back 6

– The after-tax lifetime earnings if the person went to college, including an accounting of the direct cost of college, versus
– the after-tax lifetime earring profile if the person did not go to college

Front 7

Is College a Sound Investment?

Back 7

Just like a firm investing in physical capital an individual is going to invest in education if the benefits exceed the cost

Hint 7

If the NPV>0 then the person should invest

Front 8

Predictions of The NPV Model?

Back 8

• The higher the discount rate, the less likely college attendance.
• It makes sense to invest young • College attendance will decrease if college
cost rise, all else equal.
• College attendance will increase if the returns to college increase

Front 9

What is the estimated rate of return on a year of schooling?

Back 9

Estimates vary, but somewhere between 8 and 10 percent per year seems reasonable given the best available evidence

Front 10

Methodological issues of estimated rate of return?

Back 10

- Family background bias – having an advantaged family background might influence both school attainment and wages- earnings.
- Ability bias – being of higher ability might influence both school attainment and wages-earnings.
- Selection Bias: The returns for college might be higher for those who choose to attend, and lower for those who choose not to attend

Hint 10

Someimportantcomponentsofcompensationaredifficulttomeasure • Fringebenefits
• Non-marketbenefits

Front 11

Approaches for Estimating Returns to Education?

Back 11

- Cross Section Regression
--- uses variation in years of schooling and wages-earnings between people
- Instrumental Variables (Natural Experiments)
--- Find an exogenous source of variation in and years of schooling completed and use it as an instrument for years of schooling
a. Proximity to college
b. The presence of a nearby college
c. Variation in birth dates and compulsory school laws
Family-Twin Differences (or fixed effects)
-- Deals with ability and family background bias
– Increases problem of measurement error

Front 12

What do we know about returns to skill for the disadvantaged?

Back 12

• There might be some barriers to college - as we will see (Demming and Dynarski, 2009) student enrollment and completion is responsive to the cost of college
• Rates of return are similarly high across race and different parental backgrounds, AFQT scores – or at least we don’t have strong evidence that they are different.

Front 13

Why subsidize high education?

Back 13

– There are positive externalities created by an educated populous (higher tax revenues, less crime, less poverty, better health)
– In the presence of a positive externality the competitive market will allocate too few of a resource
– Subsidies help solve this externality problem – Subsidies help with the problem of liquidity
constraints
– Subsidies increase the access of low income students to education also combat inequality.

Front 14

Types of ed Subsidies?

Back 14

Loansubsidies–federalgovernmentpaysinterest while you are enrolled in school and guarantees loans.
• Pellgrants–federalprogramprovidesmeanstested grants. This year the max award was about $4,700. Pell grant levels have increased slowly while the costs of college have increased rapidly.
• Tuitionsubsidies–If you payinstate tuitionat UW- Madison you are not paying the full cost of attending college.
• States cholarship programs(GeorgiaHOPE,CalGrant, West Virginia Promise, ect.)

Front 15

Higher Education Subsidies can be regressive

Back 15

- funded through taxes, which are regressive for poor
- schools that poor go to are of less quality

Front 16

Herrnstein and Murray Hypothesis?

Back 16

- (AFQT)isasingleandimmutable measure of intelligence (g) and is more responsible for poverty outcomes than socio- economic
background
- The War on Poverty Failed
- The population of the poor is changing – low IQ
people are pooled in poverty.
- Education isn’t going to help the poor because they are not smart enough to benefit. What should we do? Not clear.

Hint 16

Most of their results in Chapter 5 are based on a logitistics estimation where poverty status is the dependent variable and an SES index, AFQT, and age are the only independent variables

Front 17

Critique of Herrnstein and Murray?

Back 17

• The AFQT is an achievement test not an IQ test – AFQT scores at age 15-23 are affected by parental environment and school characteristics
- HM’s measure of SES is flawed in that it doesn’t differentiate between single parent and two parent families.
- HM focus on the slope parameters, but don’t focus on how much variation can be explained by SES versus AFQT
- Evaluating at the median SES and AFQT is arbitrary
- Why did they choose AFQT? There are other test scores in the NLSY that are more predictive of wages.

Front 18

Heckman Hypothesis?

Back 18

- Racial gaps in achievement are primarily due to gaps skill
- These skill gaps between blacks and whites (and between advantaged and disadvantaged whites) emerge before children enter school
- Schools have little effect on gaps

Front 19

Heckman's cause

Back 19

- Parents and families are important for skill formation.
- Parents and families are increasingly stressed and dysfunctional.

Front 20

Heckman policy implications

Back 20

– Policies should favor prevention over remediation and focus on early childhood
– Policies should assist families in child rearing – there are a number of templates (Prairie Preschool, Head Start, Abecedarian, Educare, Harlem Children’s Zone)
– The private sector should be engaged