Deck 9: Human Capital Theory: Applications to Education and Training

Question 1

In the context of investments in human capital, perfect capital markets imply all of the following, except that:

A) An individual considering an investment in human capital does not have to be concerned with the timing of expenditures.
B) An individual faces no liquidity constraints as they can borrow against expected future income.
C) An individual can base his/her human capital decision on total lifetime income.
D) An individual makes an investment decision based on his/her current income.
E) An individual considering an investment in human capital does not have to be concerned with the timing of income.

Answer 1

D

Question 2

According to the signaling theory of education,

A) Education and training do not contribute directly to productivity, but act as a filter to screen candidates.
B) The social rate of return to education is greater than the private rate of return.
C) The level of education or training of one worker affects the productivity of her coworkers.
D) Education and training function as utility-generating goods from the worker's perspective.
E) The level of education or training directly measures the productivity of the worker.

Answer 2

A

Question 3

Which of the following regarding "education as a signalling device" is correct?

A) Higher educated workers may have higher marginal costs to obtain education.
B) Lower educated workers have lower productivity.
C) Higher educated workers have higher productivity.
D) Lower educated workers may have lower marginal costs to obtain education.
E) The role of education in this model is only used as a filter, which has no effect on worker's productivity.

Answer 3

E

Question 4

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
The essence of human capital theory is that:

A) Investments are made in human resources so as to improve their productivity and, therefore, their earnings.
B) All workers who want to increase their salary should obtain a university diploma.
C) Workers invested in higher education in order to send a signal to potential employers regarding their underlying ability.
D) Firms spend money on their capital stock and equipment in order for labour to become more productive.

Question 5

Private costs and benefits are those that are:

A) accrued or incurred by society.
B) accrued or incurred by the parties investing in human capital.
C) external to the decision of investing in human capital.
D) not entered into the calculation of the value of human capital.

Question 6

In the context of discounted present value, under what conditions can the sum of the income earned in each period divided by the discounting factor be replaced by the payment divided by the rate of interest?

A) When the stream of payments is collected over a long period of time
B) When the costs of obtaining the education are zero
C) When the interest rate is high
D) When the payments are variable over time

Question 7

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
The opportunity cost of obtaining human capital is:

A) the estimate of the increase in salary that results from the acquisition of skills.
B) the direct cost of books, supplies, and tuition fees.
C) the income foregone while acquiring it.
D) the job experience lost while attending school.

Question 8

When some important variables that enter into economic decision making are not observable until after a decision has taken place, firms are said to operate in an environment of:

A) imperfect competition in the input market.
B) market equilibrium.
C) imperfect information.
D) imperfect competition in the output market.

Question 9

Which of the following statements regarding pecuniary costs is true?

A) They involve resource costs like the cost of labour.
B) They are all fixed costs.
C) They are included in the calculation of social costs and benefits.
D) They involve a transfer from one group to another.

Question 10

It is indisputable that the degree of inequality in the distribution of wages has risen drastically in North America over the past 25 years or so. The most widely accepted explanation is that:

A) There are increased exploitation of labour by unscrupulous multi-national firms.
B) Cuts in social programs such as social assistance and employment insurance negatively affect low-wage workers.
C) The increased international competition and imports tended to positively affect low-wage workers.
D) The decline of institutions tends to raise the wages of lower-paid workers.
E) The returns to education and to unobserved skill have increased.

Question 11

What is the idea behind the income-contingent loan financing scheme?

A) Grants awarded to many students should be raised in order to improve access to higher education and reduce student debt-loads upon graduation.
B) Tuition should be lowered for all students in order to improve access to higher education and reduce student debt-loads upon graduation.
C) Tuition should be raised somewhat in order to boost the quality of education, but repayment of student loans should be contingent upon graduation.
D) Tuition should be raised somewhat in order to boost the quality of education provided, but repayment of student loans should be geared to the student's income after graduation.
E) Tuition should be raised somewhat in order to boost the quality of education, but in the event of a default, student loans should be forgiven.

Question 12

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
What is Mary's present value of earning $30,000 a year from age 18 to 20 (3 years in total)?

A) $99,300
B) $109,909
C) $104,132
D) $90,000
E) $82,066

Question 13

The human capital model has strong neo-classical underpinnings. Why might a heterodox economist disagree with this approach?

A) Because it is based on the assumption that most individuals have a wide degree of choice in regards to how many years of education that they obtain
B) Because one should not draw an analogy between the decision to invest in an inanimate capital project and the decision to invest in a human.
C) Because some of the predictions that flow from the model have turned out to be wrong
D) Because the earnings function that stems from the human capital model has not been empirically validated
E) Because there are certain challenges involved in the estimation of the earnings function that stems from the human capital model

Question 14

A problem may arise while estimating the return of education. This is called:

A) omitted variable bias.
B) sample selection bias.
C) specification bias.
D) ability bias.
E) simultaneous equation bias.

Question 15

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
Now assume that after completing a one-year post-secondary program, Mary would earn $60,000 than if she had stopped her education right after high school. Should Mary complete the post-secondary program and what is the internal rate of return?

A) Yes, since the return is 100 percent
B) No, since there is no return
C) Yes, since the return is 50 percent
D) Yes, since the return is 10 percent
E) No, since the return is less than 10 percent

Question 16

A human capital earnings function is:

A) a function relating an individual's earnings to his/her professional background.
B) a function relating an individual's earnings to his/her characteristics that determine productivity.
C) a function relating an individual's earnings to his/her education level.
D) a function relating an individual's earnings to his/her level of professional training in the particular field.
E) a function relating an individual's earnings to his/her family background.

Question 17

The shape of the "age-earnings" profiles reflect all of the following, except that:

A) earnings tend to increase with age but at a deceasing rate.
B) older, more experienced workers have higher wage profiles than younger workers.
C) the earnings of individuals with higher levels of education are generally higher than those with fewer years of education.
D) individuals generally continue to make human capital investments in the form of on-the-job training and work experience once they have entered the labour force.

Question 18

Earnings with age, and thus with labour market experience, until age ________ is reached, and then _.

A) increase; 45 to 55; increase
B) decrease; 45 to 50; increase
C) decrease; 40 to 50; increase
D) increase; 40 to 50; decline

Question 19

Which of the following refers to general training?

A) It is the training that can be used at various firms.
B) It is the training that can be generalized to a wide range of jobs.
C) It is the training designed for generalists.
D) It is the training that can be used only in the firm that provides it.

Question 20

The rule for optimal human capital investment is that:

A) the individual should increase years of education until the discounted present value of the benefits of an additional year of education equals the discounted present value of the additional costs.
B) the individual should increase years of education until the discounted present value of the benefits of all of the years of education equals the discounted present value of all of the associated costs.
C) the individual should increase years of education until the discounted present value of the benefits of an additional year of education is less than the discounted present value of the additional costs.
D) the individual should increase years of education until the discounted present value of the benefits of an additional year of education is greater than the discounted present value of the additional costs.

Question 21

Which of the following factors does NOT determine the market rate of return to education?

A) Future earnings
B) Foregone income
C) Direct costs of education
D) Interest rate
E) All of the choices answer the question.

Question 22

Which of the following INCORRECTLY addresses the problem of "ability bias?"

A) In the earning function, lnY = a + bS + e, where log wages depend only on the level of schooling, S, and unobserved talent, e. The OLS estimate of the return to schooling b is biased, because unobserved talent, e, is correlated with schooling.
B) The problem of "ability bias" can be addressed by 'natural experiments" technology.
C) The estimated coefficient may understate the true causal effect, if more highly educated individuals would have earned more than less educated individuals even with the same amount of schooling as the less educated.
D) Recent empirical studies have found that the problem of "ability bias" is exaggerated.
E) The estimated coefficient may overstate the true causal effect, if more highly educated individuals would have earned more than less educated individuals even with the same amount of schooling as the less educated.

Question 23

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
How do employers typically finance training?

A) By paying workers a wage which is lower than the value of the marginal product during the early stages of the employment relationship.
B) By paying workers a wage which is greater than the value of the marginal product during the later stages of the employment relationship.
C) By paying workers a wage which is greater than the value of the marginal product during the early stages of the employment relationship.
D) By paying workers a wage which is lower than the value of the marginal product during the later stages of the employment relationship.
E) By charging the new employee/trainees an upfront, out-of-pocket fee.

Question 24

________ in the relative supply of ________ workers would their wages.

A) Decreases; skilled; depress
B) Increases; skilled; increase
C) Increases; unskilled; depress
D) Decreases; unskilled; depress

Question 25

In the context of hiring and recruitment, which of the following is not true of a sorting device?

A) It is an integral part of human capital theory.
B) It provides an alternative explanation of the positive correlation between education and earnings.
C) It involves an alternative theory to investment in training and education.
D) It illustrates the more general phenomenon of signaling in markets.

Question 26

The model of human capital can be used as an analytical tool for labour supply phenomena and labour demand phenomena. On the supply side, it is used as a tool to determine an individual's decision to invest in education. Explain in intuitive terms this approach of determining whether an individual should obtain a higher degree or certification. No graph is necessary, but you should cover the assumptions which underlie this approach and the major variables which play a role. What implication does this model have for labour supply? Discuss the role of human capital attainment in the demand for labour.

Question 27

Which of the following equations corresponds to the most common form of the empirical earnings equation? S denotes the number of years of schooling, EXP denotes the number of years of experience, AGE denotes the age of the worker, epsilon denotes a disturbance term, r denotes the rate of return to education, and ln denotes the logarithmic operator.

A) Y = a + ln r - S + þ1 - EXP + þ2 - EXP2 + ‹
B) ln Y = r - S + þ1 - EXP + þ2 - EXP2 + ‹
C) ln Y = a + r - S + þ1 - EXP + þ2 - S2 + ‹
D) ln Y = a + r - S + þ1 - EXP + þ2 - EXP2 + ‹
E) ln Y = a + r - S + þ1 - AGE + þ2 - AGE2 + ‹

Question 28

The demand-side interpretation of human capital has been challenged by another model, the signaling approach, which offers a contrasting view. What is the economic role for education in this paradigm, and how does it contrast with the economic role in the human capital model?

Question 29

Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.
Now assume that after completing a one-year post-secondary program, Mary would earn $60,000 than if she had stopped her education right after high school. The present value from age 18 to age 20 would now be given by:

A) $109,909.
B) $99,300.
C) $104,132.
D) $82,066.
E) $120,000.

Question 30

In the absence of , general training will be financed by the employees.

A) specific human capital
B) government subsidies
C) job market signalling
D) bonding arrangements

Question 31

The decision to invest in human capital does not involve which of the following?

A) Direct expenditures
B) Projected earnings
C) Forgone earnings
D) The costs of tuition and books
E) None of the choices are correct.

Question 32

Briefly review the empirical evidence on the returns to schooling, which pertains to the human capital model. Describe in general terms the age-earnings profiles of workers who hold only an elementary school education, those who hold a high school diploma, those who hold some
post-secondary education, and university-educated workers. Has the evidence indicated that investment in human capital is subject to diminishing returns?