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Human capital investment .ppt @ bec doms

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Human capital investment .ppt @ bec doms

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Human capital investment .ppt @ bec doms

  1. 1. 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. 1
  2. 2. Examples of Human Capital Investment... <ul><li>getting a college education </li></ul><ul><li>teaching your son or daughter how to cook </li></ul><ul><li>learning carpentry skills in an apprentice program </li></ul><ul><li>sharing your life with a partner </li></ul><ul><li>having a child </li></ul><ul><li>reading the newspaper </li></ul>2
  3. 3. Theory of Human Capital Investment <ul><li>People are investing in human capital by going to school. </li></ul><ul><li>The returns (or benefits) of this human capital investment include </li></ul><ul><ul><li>higher earnings </li></ul></ul><ul><ul><li>lower probability of unemployment </li></ul></ul><ul><li>The costs include foregone earnings while in school and out-of-pocket costs of education </li></ul><ul><li>Brighter individuals get more education because they are more likely to see that the marginal benefits exceed the marginal costs. </li></ul>3
  4. 4. Investment in Education <ul><li>What are the differences in earnings by educational attainment? </li></ul><ul><li>Holding years of education constant, why do earnings vary by </li></ul><ul><ul><li>occupation? </li></ul></ul><ul><ul><li>gender? </li></ul></ul><ul><ul><li>race? </li></ul></ul>4
  5. 5. Career Choice Factors <ul><li>Job-an employment position obtained mainly to earn money </li></ul><ul><li>Career-a commitment to a profession that requires continued training and offers a clear path for occupational growth. </li></ul>5
  6. 6. 6 <ul><li>Level of formal training affects financial success </li></ul><ul><li>Training may be viewed in two main categories </li></ul><ul><ul><li>Technical Skills refers to specialized career training for a specific profession. </li></ul></ul><ul><ul><li>General Skills are traits adaptable to most work situations. Some can be acquired at school, while others require experience. </li></ul></ul>Career Choice Factors
  7. 7. <ul><li>PERSONAL FACTORS </li></ul><ul><li>Aptitudes - What natural abilities, such as working well in team settings, do you possess? </li></ul><ul><li>Interests inventories - Help you determine what gives you satisfaction. </li></ul><ul><li>Your personality - How much structure do you like? </li></ul><ul><li>Do you perform best in low-pressure or high-pressure working environments? </li></ul>Career Choice Factors 7
  8. 8. Average wages, all workers over 25 – 2007 8 Data: Current Population Survey (CPS) 2008 http://pubdb3.census.gov/macro/032008/perinc/new03_001.htm
  9. 9. 9 Source: www.collegeboard.com
  10. 10. 10 Developing a Career Action Plan
  11. 11. 11
  12. 12. Obtaining Employment Experience <ul><li>Part-time employment </li></ul><ul><li>Volunteer work </li></ul><ul><li>Internships </li></ul><ul><li>Campus projects </li></ul>12
  13. 13. Using Career Information Sources <ul><li>Library </li></ul><ul><li>Media Center </li></ul><ul><li>Online </li></ul><ul><li>Career Services Office (SSB 350, 581-6786) </li></ul>13
  14. 14. Social Influences 14 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
  15. 15. Networking <ul><li>Community organizations </li></ul><ul><li>Professional organizations </li></ul><ul><li>Business contacts </li></ul>15
  16. 16. Identifying Job Opportunities <ul><li>Job advertisements </li></ul><ul><li>Career fairs (Career Fair August 24, 2011, 10:00am-2:00pm Union Ballroom) </li></ul><ul><li>Employment agencies </li></ul><ul><li>Job creation </li></ul><ul><li>Other methods </li></ul>16
  17. 17. Applying for Employment <ul><li>Resume </li></ul><ul><li>Cover letter </li></ul><ul><li>Interview </li></ul>17
  18. 18. Accepting an Employment Position <ul><li>Work environment </li></ul><ul><li>Factors affecting salary </li></ul>18
  19. 19. 19 Cumulative Earning Potential Based on Degree Earned 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
  20. 20. Evaluating Employee Benefits <ul><li>Meeting employee needs </li></ul><ul><ul><li>Flexible work schedules </li></ul></ul><ul><ul><li>Work-at-home arrangements </li></ul></ul><ul><ul><li>Legal assistance </li></ul></ul><ul><ul><li>Flexible spending plans </li></ul></ul><ul><li>Comparing benefits </li></ul><ul><ul><li>Market value </li></ul></ul><ul><ul><li>Future value </li></ul></ul><ul><ul><li>Tax impact </li></ul></ul>20
  21. 21. Tax-Equivalent Employee Benefits 21 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
  22. 22. Changing Careers 22
  23. 23. 23
  24. 24. The Return on Educational Investments has Grown Over Time <ul><li>Earnings of BA/BS recipients have grown more than inflation over the last 30+ years, with advanced degree holders capturing the largest return </li></ul><ul><li>Earnings of high school graduates have lost ground relative to inflation. </li></ul><ul><li>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 ) </li></ul><ul><li>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 ) </li></ul>24
  25. 25. 25 Unemployment Rates and Earnings Differences by Education 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. 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
  26. 26. 26 Unemployment Rates and Earnings Differences by Education 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. 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
  27. 27. 27 Unemployment Rates and Earnings Differences by Education 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. 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)
  28. 28. What are the costs? (2011 #s) 28 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
  29. 29. Cost-Benefit Assessment... <ul><li>Do the marginal benefits of education outweigh the marginal costs at the University of Utah? </li></ul><ul><ul><li>Compute the present value of the annuity (PVA) for both the marginal costs and marginal benefits and compare: </li></ul></ul><ul><ul><ul><li>For the costs, use n = 5, r = 10%, FV = $42,120 </li></ul></ul></ul><ul><ul><ul><li>For the benefits, use n=40, r = 3%, FV = $21,424 (($1,038 - 626) x 52) </li></ul></ul></ul><ul><li>Marginal Costs : </li></ul><ul><ul><li>PVA = $257,143 </li></ul></ul><ul><li>Marginal Benefits : </li></ul><ul><ul><li>PVA = $1,615,391 </li></ul></ul>29
  30. 30. Cost-Benefit Assessment... <ul><ul><li>In this instance, the benefits are clearly greater than the costs, but this may be an underestimate of the actual net benefits… Why? </li></ul></ul><ul><ul><ul><li>May understate income growth more than college costs because of the difference in the time horizon. </li></ul></ul></ul><ul><ul><ul><li>Does not factor in the value of the retirement benefits that are likely to accrue because of a better job. </li></ul></ul></ul><ul><ul><ul><li>Does not factor in other fringe benefits that are typically associated with a better job (e.g., health insurance, disability insurance, child care subsidies). </li></ul></ul></ul>30
  31. 31. Are Gains in Earnings and Related Financial Factors the Only Benefits of a College Education? <ul><li>Other benefits that accrue to the individual or household… </li></ul><ul><ul><li>greater efficiency in household production activities (e.g., shopping behavior, family finances, child development) </li></ul></ul><ul><ul><li>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) </li></ul></ul><ul><ul><li>better relationships in general; especially better marriage rltnshps </li></ul></ul>31
  32. 32. Are Gains in Earnings the Only Benefits of a College Education? <ul><li>Other benefits that accrue to society (i.e., social benefits) </li></ul><ul><ul><li>more informed voters and more likely to participate in the political process </li></ul></ul><ul><ul><li>additional earnings raise the tax base </li></ul></ul><ul><ul><li>less likely to engage in illegal activities </li></ul></ul>32
  33. 33. If education is such a good investment, why doesn’t everyone get a Ph.D.? <ul><li>Situations where the opportunity costs are exceptionally high. </li></ul><ul><li>Situations where the out-of-pocket costs are prohibitively high (e.g., low-income households). </li></ul><ul><li>Situations where other, non-pecuniary costs are quite high (e.g., time needed to study). </li></ul><ul><li>Situations where the marginal benefits are exceptionally low. </li></ul>33
  34. 34. Why do earnings vary by occupation, controlling for years of education? <ul><li>Cost-Benefit Differentials </li></ul><ul><ul><li>Recognition of differential educational investment (e.g., acquiring economic knowledge may be easier than acquiring chemistry knowledge) </li></ul></ul><ul><ul><li>Recognition that some occupations confer enjoyment above and beyond salary while others do not. </li></ul></ul><ul><ul><li>Recognition that there may be risks to the employee that one needs to compensate for (e.g., health considerations </li></ul></ul><ul><ul><li>Recognition that some jobs require more hours of work than others. </li></ul></ul><ul><ul><li>Recognition of differentials in on-the-job training. </li></ul></ul>34

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