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Human Capital Investment -

The process of increasing the household’s holdings of human wealth either by engaging in

formal or informal training or by adding

household members.

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Examples of Human Capital Investment... getting a college education teaching your son or daughter how to cook learning carpentry skills in an apprentice

program sharing your life with a partner having a child reading the newspaper

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Theory of Human Capital Investment People are investing in human capital by going to school. The returns (or benefits) of this human capital investment include

higher earnings lower probability of unemployment

The costs include foregone earnings while in school and out-of-pocket costs of education

Brighter individuals get more education because they are more likely to see that the marginal benefits exceed the marginal costs.

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Investment in Education What are the differences in earnings by

educational attainment? Holding years of education constant, why

do earnings vary by occupation? gender? race?

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Career Choice Factors Job-an employment position obtained

mainly to earn money Career-a commitment to a profession that

requires continued training and offers a clear path for occupational growth.

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Level of formal training affects financial success

Training may be viewed in two main categories

Technical Skills refers to specialized career training for a specific profession.

General Skills are traits adaptable to most work situations. Some can be acquired at school, while others require experience.

Career Choice Factors

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PERSONAL FACTORS

Aptitudes - What natural abilities, such as working well in team settings, do you possess?

Interests inventories - Help you determine what gives you satisfaction.

Your personality - How much structure do you like?

Do you perform best in low-pressure or high-pressure working environments?

Career Choice Factors

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Average wages, all workers over 25 – 2007

21,881

33,609

59,365

70,559

121,340

95,785

0 50,000 100,000 150,000

< HS

HS

Bachelor's Degree

Masters Degree

Professional Degree

Doctorate

Avg Salary

Data: Current Population Survey (CPS) 2008

http://pubdb3.census.gov/macro/032008/perinc/new03_001.htm

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Source: www.collegeboard.com

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Developing a Career Action Plan

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Obtaining Employment Experience Part-time employment Volunteer work Internships Campus projects

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Using Career Information Sources Library Media Center Online Career Services Office (SSB 350, 581-6786)

Social Influences

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City 1 Index number x salary City 2 Index number

= $ buying power

Cityrating.com/costofliving.asp

Bestplaces.net/col (separates into categories)

If Omaha, Nebraska has an index number of 93.3 and Chicago has an index number of 123, a person moving from Omaha making $30,000 annually would need to make $39,550 in Chicago to be making the same real salary: 123 x $30,000 93.3 = $39,550

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Networking Community organizations Professional organizations Business contacts

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Identifying Job Opportunities Job advertisements Career fairs (Career Fair Prep Week Jan 24-Feb 3)

Employment agencies Job creation Other methods

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Applying for Employment Resume Cover letter Interview

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Accepting an Employment Position

Work environment Factors affecting salary

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Education Avg. Income

No high school graduation $1,573,851

High school graduate $2,342,793

Bachelor’s degree $4,281,887

Advanced degree $6,207,032

Cumulative Earning Potential Based on Degree Earned

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Evaluating Employee Benefits Meeting employee needs

Flexible work schedules Work-at-home arrangements Legal assistance Flexible spending plans

Comparing benefits Market value Future value Tax impact

Tax-Equivalent Employee Benefits

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Value of the benefit this formula calculates the tax-equivalent value of a (1-Tax Rate) non-taxable benefit.

Example:Receiving a $350 tax free benefit is worth $486 of taxable benefits if you are in the 28 percent tax bracket, calculated as follows:

$350 = $350 1-.28 .72 =$486

A variation of this formula would give the after-tax value of a taxable benefit:

Taxable value of the benefit x (1-Tax Rate)

Using the above example,

$486 (1-.28) = $486 (.72) = $350

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Changing Careers

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Variation in Earnings Within Education Levels

2

5

8

11

19

31

12

23

39

40

46

51

22

27

31

27

23

12

19

19

14

12

8

3

13

10

5

5

2

1

Master's Degree or Higher

Bachelor's Degree

Associate Degree

Some College, No Degree

High School Graduate

Grades 9-11

$1 - $19,999 $20,000-$39,999 $40,000-$59,999 $60,000-$79,999 $100,000 or more

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The Return on Educational Investments has Grown Over Time

Earnings of BA/BS recipients have grown more than inflation over the last 30+ years, with advanced degree holders capturing the largest return

Earnings of high school graduates have lost ground relative to inflation.

The typical bachelor’s degree recipient can expect to earn 73% more over a 40 year working life than the typical high school graduate (http://tsp.convio.net/site/PageServer?pagename=education_pays)

By the age of about 33, the typical college graduate has earned enough to compensate for both paying full tuition and fee charges at the average public four-year college and foregone earnings with a high school degree (http://tsp.convio.net/site/PageServer?pagename=education_pays)

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Unemployment Rates and Earnings Differences by Education

Unemployment Rate Educational Level Median Weekly Earnings

1.9% Doctoral Degree $1,550

2.4% Professional Degree $1,610

4.0% Master’s degree $1,272

5.4% Bachelor’s degree $1,038

7.0% Associate degree $767

9.2% Some college, no degree $712

10.3% High-school graduate $626

14.9% Less than a high school diploma

$444

Source: Bureau of Labor Statistics, Current Population Survey.

http://www.bls.gov/emp/ep_chart_001.htm

Data are 2010 annual averages for persons age 25 and over. Earnings are for full-time wage and salary workers.

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Unemployment Rates and Earnings Differences by Education

Unemployment Rate Educational Level Median Weekly Earnings

2.0% Doctoral Degree $1,561

1.7% Professional Degree $1,531

2.4% Master’s degree $1,233

2.8% Bachelor’s degree $1,012

3.7% Associate degree $757

5.1% Some college, no degree $699

5.7% High-school graduate $618

9.0% Less than a high school diploma

$453

Source: Bureau of Labor Statistics, Current Population Survey.

http://www.bls.gov/emp/ep_chart_001.htm

Data are 2008 annual averages for persons age 25 and over. Earnings are for full-time wage and salary workers.

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Unemployment Rates and Earnings Differences by Education

Unemployment Rate Educational Level Median Weekly Earnings

1.9% ( .1%) Doctoral Degree $1,550 ( $11)

2.4% ( .7%) Professional Degree $1,610 ( $79)

4.0% ( 1.6%) Master’s degree $1,272 ( $39)

5.4% ( 2.6%) Bachelor’s degree $1,038 ( $26)

7.0% ( 3.3%) Associate degree $767 ( $10)

9.2% ( 3.1%) Some college, no degree $712 ( $13)

10.3% ( 4.6%) High-school graduate $626 ( $8)

14.9% ( 5.9%) Less than a high school diploma

$444 ( $9)

Source: Bureau of Labor Statistics, Current Population Survey.

http://www.bls.gov/emp/ep_chart_001.htm

Data are 2010 compared to 2008 annual averages for persons age 25 and over. Earnings are for full-time wage and salary workers.

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What are the costs? (2011 #s)University of

Utah

Tuition & fees for 2 semesters

$7,768

Books $1,800

Foregone Earnings (2010 HS degree – men, $626 x 52)

$32,552

Total Costs $42,120

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Cost-Benefit Assessment...

Do the marginal benefits of education outweigh the marginal costs at the University of Utah?

Compute the present value of the annuity (PVA) for both the marginal costs and marginal benefits and compare:

For the costs, use n = 5, r = 10%, FV = $42,120 For the benefits, use n=40, r = 3%, FV = $21,424 (($1,038 - 626) x 52)

Marginal Costs: PVA = $257,143

Marginal Benefits: PVA = $1,615,391

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Cost-Benefit Assessment... In this instance, the benefits are clearly greater than the

costs, but this may be an underestimate of the actual net benefits… Why?

May understate income growth more than college costs because of the difference in the time horizon.

Does not factor in the value of the retirement benefits that are likely to accrue because of a better job.

Does not factor in other fringe benefits that are typically associated with a better job (e.g., health insurance, disability insurance, child care subsidies).

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Are Gains in Earnings and Related Financial Factors the Only Benefits of a College Education?

Other benefits that accrue to the individual or household… greater efficiency in household production activities

(e.g., shopping behavior, family finances, child development)

greater non-pecuniary benefits of employment (e.g., occupations where you set your own hours, work at home, do more challenging tasks, reduce health risks)

better relationships in general; especially better marriage rltnshps

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Are Gains in Earnings the Only Benefits of a College Education?

Other benefits that accrue to society (i.e., social benefits) more informed voters and more likely to participate in

the political process additional earnings raise the tax base less likely to engage in illegal activities

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If education is such a good investment, why doesn’t everyone get a Ph.D.?

Situations where the opportunity costs are exceptionally high.

Situations where the out-of-pocket costs are prohibitively high (e.g., low-income households).

Situations where other, non-pecuniary costs are quite high (e.g., time needed to study).

Situations where the marginal benefits are exceptionally low.

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Why do earnings vary by occupation, controlling for years of education?

Cost-Benefit Differentials Recognition of differential educational investment (e.g.,

acquiring economic knowledge may be easier than acquiring chemistry knowledge)

Recognition that some occupations confer enjoyment above and beyond salary while others do not.

Recognition that there may be risks to the employee that one needs to compensate for (e.g., health considerations

Recognition that some jobs require more hours of work than others.

Recognition of differentials in on-the-job training.