ECONOMICS 100A - Download as PowerPoint by z8OBCl

VIEWS: 2 PAGES: 35

									Econ 152




           Review
           Signaling




                10/1/2012          1
                            10/1/2012
Econ 152


                                                        Clo
                       $


                    VMPhi
                                                        Chi

                    VMPlo


                            1 2 3 4 5               s

           How many years of schooling above should firms
           require for the high wage job?
           • A. 1    B. 2    C. 3 D. 4 E. 5




                                        10/1/2012             2
Econ 152


                                                    Clo
                   $


                VMPhi
                                                    Chi

                VMPlo


                        1 2 3 4 5 6             s

       2. Would high types be willing to invest s=6 years of schooling to
       get the higher wage?

       A. Yes
       B. No

                                 10/1/2012                                  3
Econ 152


                                                      Clo
                     $


                  VMPhi
                                                      Chi

                  VMPlo


                          1 2 3 4 5 6             s

           3. Would low types be willing to invest s=1 years of schooling to
           get the higher wage?

       A. Yes
       B. No

                                   10/1/2012                                   4
Econ 152


                                                       Clo
                     $


                  VMPhi
                                                       Chi

                  VMPlo


                          1 2 3 4 5 6              s

           4. Would low types be willing to invest s=6 years of schooling to get
           the higher wage?

       A. Yes
       B. No

                                   10/1/2012                                       5
Econ 152



           Opinion Poll
           • Do you expect to score above average on the
             upcoming midterm?
              – A. Yes
              – B. No


           • Fact: For any given job or task, more than 50% of
             people polled will say they are above average




                             10/1/2012                           6
Econ 152



           Opinion Poll
           • Look at the person on your right. Do you expect
             him/her to score above average on the upcoming
             midterm?
              – A. Yes
              – B. No




                            10/1/2012                          7
Econ 152



           Question
           • Suppose you know how smart you are, but I don’t.
           • Suppose I’m lazy (or my T.A. is) and we don’t want to grade a lot
             of finals.
           • Suppose that before the final, I offer to give anyone a guaranteed
             B- if they skip the final.
           • Which students would take the offer?
              – A. Above average
              – B. Below average
              – C. Everybody




                                 10/1/2012                                   8
Econ 152



           Distributional Issues (1)
           • Workers with above average abilities like screening
              – If I am highly productive I want you to find that out
           • Less productive workers don’t like screening.
              – If I am less productive, I’d rather be lumped in with the
                productive workers and paid the average
           • If workers uncertain of ability, then might like
             screening.
              – (Most people think they are above average).




                                 10/1/2012                                  9
Econ 152



           Notes on Adverse Selection
           • In general, wage compression (i.e., offering the same
             package to all workers) will lead to adverse selection, with
             less productive workers flocking to take the package.
              – Example: Unions tend to do this (get contracts that
                 feature wage compression.)
              – Based on the logic of selection, should union workers be
                 more or less productive than non-union workers?
                   • A. More
                   • B. Less
                   • C. Can’t tell
           • Moral: If you’re talented, you choose someplace where you
             get compensated for your extra productivity




                                 10/1/2012                                  10
Econ 152




           Chapter 3
           Investment in Skills




                10/1/2012               11
                                  10/1/2012
Econ 152



           Opinion Poll
           • Raising the interest rate will likely cause:
              – A. More students to finish high school
              – B. Fewer student to finish highschool
              – C. No effect on HS graduation




                                10/1/2012                   12
Econ 152



           Preview of Chapter Themes
           • What determines optimal amount of education people
             obtain?
           • Who Should Pay for General On-the-Job Training?
           • Who Should Pay for Firm–specific OJT?




                            10/1/2012                         13
Econ 152



           Question 1
           • You’ve just won the state lottery and will receive 20 annual
             payments of $70,000, with the first payment arriving 1 year from
             today.
           • Interest rate, r=8% per year.
           • If someone offered to buy your stream of winnings for a one-time
             payment of $1,000,000, would you sell?
               – A. Yes
               – B. No
               – C. Can’t tell




                                10/1/2012                                  14
Econ 152



           Present Discounted Value
           • Consumption in future is not as valuable as
             consumption today
           • Interest rate r is one way to capture this
              – $1→$(1+r) next period




                              10/1/2012                    15
Econ 152



            Question 2
           • Your savings bond indicates the bank will pay you
             3$ next period.
           • Interest rate r=50%.
           • How much is your bond worth to me today?
             (i.e., how much would I pay you for it today?)
              –   A. $4.50
              –   B. $2
              –   C. 1$
              –   D. Can’t tell




                                  10/1/2012                      16
Econ 152



           Present Discounted Value
           • Consumption in future is not as valuable as
             consumption today
           • Interest rate r is one way to capture this
              – $1 today→$(1+r) next period
              – $1 next period→$1/(1+r) today




                               10/1/2012                   17
Econ 152

       Optimal Education
       •   Consider worker age A,         •   PDVno schoo=
           retires at 65, deciding            JA + JA+1/(1+r)+ JA+2/(1+r)2 +…
           whether to go to school
           1 more year.
       •   Rule: Will go to school
           if PDV getting more ed.
           > PDV of not getting
           more ed.
       •   r=discount rate
       •   Kt =Wage at t if gets
           more ed.
       •   Jt = Wage at t if doesn’t
           get more ed.
       •   CA = Cost of tuition,
           books, etc. per year at
           age A



                                       10/1/2012                                18
Econ 152

       Optimal Education
       •   Consider worker age A,         •   PDVno schoo=
           retires at 65, deciding            JA + JA+1/(1+r)+ JA+2/(1+r)2 +…
           whether to go to school        •   PDVno school=
           1 more year.                         65
                                                     Jt               J                      J 65
       •   Rule: Will go to school              (1  r)t  A
                                               tA
                                                               J A  A1  ... 
                                                                     (1  r )           (1  r )65 A
           if PDV getting more ed.                                        65
                                                                                   Kt
           > PDV of not getting           •   PDVschool = C A                        t A
           more ed.                                                    t  A1 (1  r )
       •   r=discount rate
                                          •   Go 1 more yr if PDVschool> PDVno school
       •   Kt =Wage at t if gets
           more ed.                                         65              65
                                                                Kt                  Jt
       •   Jt = Wage at t if doesn’t           CA                 tA
                                                                                       tA
           get more ed.                             t  A1 (1  r )      t  A (1  r )
       •   CA = Cost of tuition,
           books, etc. per year at                     65
                                                             Kt  J t
           age A                                        (1  r )t  A  C A  J A
                                                     t  A1




                                       10/1/2012                                                        19
Econ 152

       Optimal Education
       •   Consider worker age A,
           retires at 65, deciding
           whether to go to school
           1 more year.                        65
                                                      Kt  J t
       •   Rule: Will go to school               (1  r )t  A  C A  J A
           if PDV getting more ed.            t  A1
           > PDV of not getting           • MB                   MC
           more ed.
                                          •     PDV extra earnings age A+1 to 65 >
       •   r=discount rate                      PDV cost of schooling.
       •   Kt =Wage at t if gets          •     NOTE: Opportunity Cost is JA Usually
           more ed.                             JA>CA !!
       •   Jt = Wage at t if doesn’t
           get more ed.
       •   CA = Cost of tuition,
           books, etc. per year at
           age A



                                       10/1/2012                                       20
Econ 152



            Question 3
           • Interest rates are falling. Do you expect more or fewer people
             to get additional schooling? (Assume these students don’t
             need student loans.)
              – A. More
              – B. Fewer
              – C. Can’t tell

           • Value of income today fell relative to income tomorrow. So
             opportunity cost of schooling down.
           • Therefore: get more schooling




                                 10/1/2012                                    21
Econ 152



           Determinants of Schooling
                          65
                                 Kt  J t
                            (1  r )t  A  C A  J A
                         t  A1

           • Likelihood of getting more schooling goes down if :

              – CA up
              – Current wage JA up
              – High current schooling
                (Wage gains from schooling go down - diminishing returns).
              – Years till retirement down
              – r up
              – Kt-Jt down



                                10/1/2012                                    22
Econ 152



           REAL WORLD
           • Throughout most of 20th century, years of schooling rose
              – Explains a large part of economic growth
           • Since 1979 Kt-Jt up!
              – One explanation: Technological change makes ed more
                important.
           • Years of schooling not up very much
              – Why? Puzzle.
           • Wage Inequality
              – Much of increase in wage inequality explained by increased
                return to education




                                10/1/2012                                23
Econ 152



           Opinion Poll
           • Is wage inequality due to Kt-Jt bad?
              – A. Yes
              – B. No
              – C. Don’t know

           • Equality
              – Equality valued by many people
              – Inequality may cause social problems
           • But…..
              – If Kt-Jt=0, nobody goes to college!!
              – No technological progress
              – Lower economic growth
              – Competitive disadvantage with other nations in value-
                added industries


                                 10/1/2012                              24
Econ 152



           On the Job Training
           • Clip




                      10/1/2012   25
Econ 152



           On the Job Training
           • Key distinction:
              – General vs. Firm-specific training
           • Learn economics. General: Useful at hundreds of
             universities and in business.
           • Learn library system used only by UCSB: Specific




                                10/1/2012                       26
Econ 152

       Who should pay for OJT? Analysis
      • 2 periods.                     •
      • Cost of training = C.
      • Alternative wage (both
        periods)=Wa
      • m=increase in prod’y.        Wa+m
      • Period 2:
                                      Wa
      • Firm must pay prod’y
        outside                      Wa-m
         – W2=Wa+m
      • Period 1
      • Must pay over 2 periods at
        least what worker could             Period 1   Period 2
        earn elsewhere. (But pays
        the same, to minimize cost).
         – W1+W2=Wa+Wa=2Wa
      • W1= 2Wa- W2=
        2Wa-(Wa+m)=Wa-m

                              10/1/2012                           27
Econ 152

       Who should pay for OJT? Analysis
      • Profits?                        •
         – Π=Output1+Output2-W1-
            W2
            =(Wa-C)+ (Wa+m)-2Wa Wa+m
            =m-C
         – So if m>C firm makes a
            profit.                      Wa
      • But suppose π>0 What
        would happen then?              Wa-C
                                        Wa-m
      • Other firms will start doing
        this too, and Wa will rise.
         – If you can make profit
            paying 2Wa+m-C, then               Period 1   Period 2
         – I can make profit paying
            2Wa+m-C + x
         – I’ll steal all your workers.



                                10/1/2012                            28
Econ 152

       Who should pay for OJT? Analysis
      • Lesson 1: Zero profit          •
        condition (when workers are                     Other firms
        mobile and no entry barriers                       pay
        for firms) is robust to OJT.  Wa+m
      • Lesson 2: Must make
        workers cover cost of
                                        Wa
        training through lower
        wages in period 1.                               Your firm
      • If don’t, and firm subsidizes                      pays
        training and tries to regain
        training costs by paying
        lower than VMP wage in               Period 1      Period 2
        period 2, then worker will
        get poached by another firm.
      • (Same logic as w/screening).



                               10/1/2012                              29
Econ 152



           OJT and Age
           • Younger worker more likely to choose jobs requiring
             OJT because longer payback period.
           • Wage vs. age:




                             10/1/2012                             30
Econ 152


           Firm-Specific Human Capital
                                            •
       • How to set wage given that
         OJT will raise prod’y at
         current firm only?            Wa+m
       • Say, Worker pays cost of      Wa+k
         training, gets all benefit in   Wa
         period 2:
           – W1=Wa-C, W2=Wa+m           Wa-C
       • Problem: Firm can insist
         on paying less. Worker
         can’t do as well at other
         firms, so wants to stay on.
                                                Period 1   Period 2




                                10/1/2012                             31
Econ 152


           Firm-Specific Human Capital
                                                   •
       • How to set wage given
         that OJT will raise prod’y
         at current firm only?         Wa+m
       • Say, Firm pays cost of        Wa+k
         training, gets all benefit in
         period 2: W1=W2=Wa             Wa
       • Problem: Worker can ask
         for raise because firm has Wa-C
         lost money after period 1
         and needs worker.
       •    Firm gets Wa+m from worker
            in period 2, so it’s in the firms
            interest to pay W1+k                       Period 1   Period 2




                                       10/1/2012                             32
Econ 152


           Firm-Specific Human Capital
       • Solution: Firm and            •
         worker share cots of
         training and split
         rewards.                  Wa+m
                                   Wa+k
                                        Wa
                                       Wa-k
                                       Wa-C



                                              Period 1   Period 2




                           10/1/2012                                33
Econ 152



           Example: The Pursuit of Happyness
           • Why does firm have internship program?
           • Why does Will Smith not get paid?




                            10/1/2012                 34
Econ 152



           Firm-specific H.C. in Real World?
           • Examples
              – Familiarizing yourself with characteristics of sales line
              – Very specific skills: Schlumberger in Indonesia
           • Evidence job change leads to lower wage.
           • Industry-specific HC.
              – Neal: After plant-closing, workers who get new job in same
                industry earn more. Those who get new job in new industry
                earn less.
              – Job re-training programs typically do not restore workers
                previous wage




                                10/1/2012                                    35

								
To top