Internal-rate-of-return.ppt

College Education as an Investment in Human Capital Reading: Arai (1998) Cohn and Geske (1992) College education as an investment in human capital From the viewpoint of individuals Benefit Cost From the view point of entire society, External economies of higher education Desirable social norm and values Higher literacy enhance communication and democracy Produce competent leaders who has favorable effects on the society It is the private costs and benefits that influence an individual’s college-going behavior. Analytical methods Cost-Benefit Analysis Attend college if BenefitCost, Methods Calculate the “present value” of education Calculate the “rate of return to education” Mincer’s earnings function (Mincer 1974) Measure the return to schooling Why do you go to college? Cost-Benefit Analysis Private cost Tuition Forgone earnings and work experience Private benefit Earnings Non-monetary benefits Private Cost (opportunity cost) Direct cost: tuition fees, books (Room and board should not be included as part) Forgone earnings: Upon attending college, the potential earnings as a high-school graduate worker during the school years will be lost. For a full-time college student, one-year college education incurs one-year forgone earnings (i.e. one-year salary of semi-skilled workers with high school diploma) For a part-time college student, the forgone earnings equals the one-year forgone earnings for full-time students minus the part-time earnings. Efforts and psychological cost Depends on academic ability Private Benefit Monetary benefit “College wage premium”: Wage difference between college and high school Lower the probability of unemployment Higher the probability to be promoted as a section leader/manager More likely to engaged in jobs with better fringe benefits and working conditions than high school graduates Private Benefit Non-monetary benefit Psychological benefits (social acceptance) Improve ability to communicate, collect information, and make wise