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Human capital theoryby C. Echevarria

Human capital theoryby C. Echevarria

BFW, ch. 6M. Turcotte

Outline1. Investment decision2. Human Capital3. Formal Educationa) Relation between Education and

Productivityb) Investment Decisionc) Why a different male and female

decision?d) Gender Differences

Outline4. On-the-Job Training (learning by doing)

1. Relation between Experience and Productivity2. Investment Decision 3. Why a Different Decision?4. Gender Differences

5. Other supply-side explanations

Investment decision• Suppose you have PV (present value)

and the interest rate is i. In one year you have PV + PV · i = PV (1+i)

• In two years, PV (1 + i) (1 + i) = PV (1 + i)2

• In t years, FV (future value) = PV (1 + i)t

Investment decision• Conversely, the present value of FV t

years from now PV = FV / (1 + i)t

• If instead of one payment, we have N payments of value It: “present value of a stream of payments”

∑t=1, N It / (1 + i)t

Investment decision• do not invest if P > ∑t=1, N It / (1+d)t

• invest if P < ∑t=1, N It / (1+d)t

– P = initial investment – N = years it yields a return– d = discount rate (subjective)– It = interest (return) in year t

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Human capitalHuman capital investments: resources invested in an individual today to increase his/her future productivity (earnings).

Include nutrition, health care, formal education, on-the-job training, etc.

Differences between the human and physical capital: nutrition, health care or formal education are also a good in itself.

Formal Education

a) Relation between Education and Productivity

Formal Educationb) Investment Decision

In general: compare cost with present value of stream of benefits In this case:

• benefits = differences in wages; • cost has two components: direct costs

(DC) ; and opportunity cost (OC).

Investment decision• No: DC + OC >

∑t=1,N (wct - wht) / (1+d)t,

• Yes: DC + OC < ∑t=1,N (wct - wht) / (1+d)t,

– DC = direct cost– OC = opportunity cost– wct = wage of a college grad. at t– wht = wage of a high school grad. at t

Formal Education

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Formal EducationReasons for different decisions:

1. Different direct costs. 2. Different opportunity costs. 3. Difference in wages depend on individual

abilities. 4. Different intertemporal preferences.

Formal education Private rate of return r that makes

DC + OC =∑t=1,N (wct - wht) / (1+r)t

– If d > r, no– If d < r, yes

Formal Education(pg. 163) The experience earnings

profile = annual earnings associated with each level of labor market experience for each level of education.

Formal Educationc) Why a different male and female decision?

I. Amount1. Private rate of return of education different

for men and women. 2. Shorter expected work life: the lower the

fertility, the higher the level of female education and vice-versa.

Formal EducationII. Fields: Societal Discrimination (??)1. Perception of (gender appropriate)

competences.2. Unfriendly environment 3. Subtle barriers.

Formal Educationd) Gender Differences

I. Amountenrolment = flow variable.average years of schooling = stock variable.Cohort (or generation) effect

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Formal Education• II. Fields (2008)• Female dominated: humanities,

communication, education, fitness • Gender neutral: agriculture, life sciences• Male dominated: engineering, computer

science, economics, mathematics

Field of study1992 2008

Total – Instructional programs 56.4 60.0

Architecture, engineering and related services 17.5 22.2

Mathematics, computer and information sciences 35.2 30.4

Personal, protective and transportation services 18.2 44.9

Business, management and public administration 51.4 53.0

Agriculture, natural resources and conservation 36.7 55.9

Physical and life sciences, and technologies 45.6 57.3

Humanities 63.7 64.3

Visual and performing arts and communication technology 65.9 66.5

Social and behavioural sciences, law 59.3 67.0

Other instructional programs 73.6 69.4

Education 72.6 76.1Health, parks, recreation and fitness 68.0 77.0

Percentage of women among university graduates, by field of study, Canada, 1992 and 2008

Women among enrolments and completions in registered apprenticeship training programs, by non-traditional trade group, Canada, 2007 3. On-the-Job Training

(learning by doing)a) Relation between Experience and

Productivityb) Investment Decision

I. General TrainingIncreases worker's productivity in all (or many) firms; employee pays the cost (apprenticeship).

General training On the job training• UU’ – experience earning profile of

unskilled (equals productivity)

• GG’ – experience earning profile of trained (equals productivity)

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On-the-Job TrainingII. Firm-Specific Training

Increases worker's productivity only at the firm providing the training. Employer and employee share costs and benefits.

Firm specific training

On the job training• UU’ – experience earning profile of

unskilled (equals productivity)

• GG’ – experience productivity profile of trained

• SS’ – experience earning profile of trained

On-the-Job Trainingc) Why a Different Decision?- Shorter work life.- Firms expecting women to have a high turn-over will be more willing to invest in men.

On-the-Job Trainingd) Gender Differences Both sexes Women Men

2002 2008 2002 2008 2002 2008

Total – Studies or training 30.1 36.0 30.2 35.9 29.9 36.2

Studies 8.2 8.1 8.9 8.7 7.6 7.6Training 24.6 30.6 24.5 30.1 24.7 31.2

Proportion of persons who received support from an employer 52.0 49.9 48.0 46.0 56.5 54.6

Proportion of Canadians aged 25 to 64who took job-related studies or training

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4. Other supply-side explanations

1.The "baby penalty“=e1-e2=skill depreciation

Other supply-side explanations

• Baby penalty estimated 3% per year of absence (Caranci and Gauthier)

Other supply-side explanations

2. Longer hours at home reduce effort at work and decrease productivity.

3. Quitting jobs (and decreasing tenure) more often than men

4. Giving up opportunities5. Turning down promotion opportunities6. Putting less effort on job searching.

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Discriminationby C. Echevarria

BFW, ch. 7

Outline

1. Measurement: the Oaxaca decomposition1. Extent

2. Models of labour market discrimination1. Statistical discrimination

2. A taste for discrimination (pure discrimination)

3. Subtle forms of discrimination

Outline

3. Segregation and wage differential1. The overcrowding model

2. Other explanations

4. Policy1. Empirical evidence on impact of these policies

Labour market discrimination

Labour market discrimination: when two equally qualified individuals are treated differently solely on the basis of gender, race, etc.

Measurement: the Oaxaca decomposition

Estimates discrimination as a residual: anything not explained by difference in qualifications.

1. Divide the sample into two sub-samples (male and female) and estimate the wage equation for both.

Measurement

The average wage for men and women:

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Measurement

2. Decompose the difference into two parts:

a) Difference due to different qualifications

b) Unexplained difference (attributed to labour market discrimination)

Measurement

Measurement Measurement

Measurement

Extent

Early 1980s: 38 points gap in earnings:

- 16 points: diff in hours

“Discrimination” explains from 5 to 20 points

Models of labour market discrimination

Statistical discriminationJudging an individual in the basis of group

characteristics.Rational but illegal.

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Models of labour market discrimination

A taste for discrimination (pure discrimination) Employer discrimination

Employer dislikes working with women: non-pecuniary cost.

Compensation = value in dollars of this (personal) cost = discrimination coefficient (d) = measure of the distaste of the employer.

Employers act as if w (1+de) were the wage paid to women when they pay w.

Models of labour market discrimination

Employee (co-workers) discrimination

1. Male employees dislike working with women: employer needs to pay an “unpleasant conditions” premium. Usual response: segregation.

Male co-workers act as if w (1- dw) were the wage received when they receive w

1. Lowering the productivity of the male co-workers (case of a female boss)

Models of labour market discrimination

3. Worse on-the-job training

4. Excluding women from unions.

Customer discrimination

Customers act as if p (1+dc) were the price paid when they pay p.

Models of labour market discrimination

Subtle forms of discrimination ("glass ceiling“). 1. Women in male dominated occupations lack

role models.2. It is difficult to find a mentor for a women in a

men dominated field.3. They cannot participate in the informal

network (the "old boys club" problem).

Segregation and wage differential

The overcrowding model

Why segregation implies a wage gap in the absence of other discrimination (assumes segregation)

No segregation and no discrimination: men and women with same qualifications are paid the same.

Segregation and wage differential

Segregation: if the demand for female labour is proportionally lower than the demand for male labour, female wages will be lower than male wages.

Alternative explanation for relation

wage/segregation

Femaleness penalty

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Segregation and wages Segregation and wages

Explanations for segregation (other than disc.)

1. Women avoid occupations with high "baby penalty"

2. Because they are not the main breadwinner, they avoid unpleasant, unsafe, …, occupations.

3. Women avoid occupations with “high commitment” (Sovala)

Policy

1. Equal employment opportunity (EEO):Discrimination on employment on the basis of race, sex, etc., is prohibited. Employers should pay the same wages to workers who do substantially equal work

2. Affirmative action (employment equity in Canada):Employers should give preference, other things being equal, to women, aboriginal people, handicapped and visible minorities to remedy imbalances (systemic discrimination) in the labour force.

Policy

3. Comparable worth : Employers should pay the same wages to workers whose work involves similar skills, efforts, and responsibility, and similar conditions of safety, unpleasantness, etc., even if they do not do substantially the same work.

EEO = equal pay for equal work, CW = equal pay for work of comparable worth.

CW = administrative concept of value

Policy

Theoretical problems: a) may hurt women by creating unemployment b) large administrative costs

Practical (endemic) problems: a) lack of compliance b) lack of male comparators for female jobs

PolicyEmpirical evidence on impact of these policies

1. EEO (implemented in the 1950s) was not very effective on closing the gap.

2. Employment Equity Act of 1986: more effective on closing the gap

3. CW: only applied in the public sector except in Ontario.

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Policy

Baker and Fortin (2000) compared Ontario to Québec. Findings:

even where the legislation had "bite", positive effects on women's wages in female jobs were statistically insignificant

negative effects on female employment are insignificant (lack of substitution between men and women = low demand elasticity)

Policy

surprising result: the most consistently estimated effects is that the law suppressed wage growth for women working in male jobs (and to a lesser extent for males working in female jobs): law is likely to have unintended consequences.

the gender wage gap closed at a similar rate in Ontario and Québec.

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Labour market issuesby C. Echevarria

BFW, ch. 8

Ferrao

Outline

1. Unemploymenta) Definitionsb) Measurementc) Patterns of unemploymentDurationDemographic variation

d) The burden of unemploymente) Gender differences in unemploymentDataReasons for the differential

f) Burden of unemployment for women

Outline

2. Unions

Reasons

3. Hours of work

Unemployment

Definitions

Cyclical unemployment: due to the business cycle (or wage rigidity).

Cyclical unemployment fluctuates around the natural rate of unemployment (NAIRU): it depends on institutions. It is always (equal or) greater than

Frictional unemployment: unemployment due to the time it takes to match workers and jobs

Unemployment

Measurement

Unemployed = actively searching for a job. About 17% of unemployed quit looking after a month.

Employed = if you work one hour per week.

Unemployment

Patterns of unemployment

Duration

25% find a job during a month.

50% up to 6 months.

25% unemployed for more than six months.

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Unemployment

Has an effect in the unemployment rate.

Both countries: 100 workers, incidence = 5%;

Country 1 duration = 1 m; UR = 5%

Country 2 duration 80% = 1m, duration 20% = 6 m; UR = 10%

Month UR

January 5

Feb. 6

March 7

April 8

May 9

June 10

July 10

Unemployment

2/3 of the increase in the UR over the last 2 decades due to an increase in duration.

Demographic variation

Higher for young people.

Difference between groups due to separation.

Unemployment

The burden of unemployment

Frictional unemployment does not have much of a (negative) impact for the economy.

Individual?

1.Economic hardship.

2.Permanent effects because of the loss in experience and tenure.

3.Psychological costs.

Unemployment

Gender differences in unemployment

Data

Until recently: The difference fluctuates -cyclical pattern. Business cycles affects male employment rates more.

Unemployment Unemployment (2010)

Male UR: 9.4%

Female UR: 7%

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Unemployment

Reasons for a positive differential

A larger separation rate:

The larger proportion of women reentering the labor force. In 2009, 55% of unemployed women were so after reentering the LF (vs 42% of unemployed men)

Women work in occupations in which quitting the job is more likely, because of the lack of rewards for tenure (no career ladder).

Unemployment

Reasons for a negative differential

1. Women are more likely to be discouraged workers (cyclical)

2. Men and women are employed in different occupations and industries (both cyclical and natural rates)

Women used to get unemployed more often but they were less time unemployed. Not any more.

Unemployment

Burden of unemployment for womenWas unemployment less painful for women, because their spells of unemployment are shorter?

It depends on the main reason for a shorter spell.

Unions

Historically, low female representation in unions.

Union membership has been declining in the US since 1950. Not the case in Canada.

1961 Density

Men 38%

Women 15.6

Total 30%

Unions

Reasons Did not admit women

until the beginning of the 20th century. Tended to neglect female concerns as harassment, parental leave or day care. (Made in Dagenham – 1968 Ford sewing machinists strike – UK 1970 Equal pay act)

2009 Density

Men 30

Women 33

Total 32

UNIONS

Women not possessing characteristics that make unionization likely: occupational distribution,

job tenure, and

full time work.

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Unions

Why did the gender unionization gap close?

1. On the part of women:

Length of job tenure increasing

More likely to work full time.

2. On the part of unions:

Effort to unionize services

More attention to women’s issues

Hours of work

Directly, fewer hours mean lower earnings at the same wage rate Indirectly, fewer hours mean less

experience and less tenure which translate into fewer promotions (reduced hours understood as lower commitment) In 1991 (all workers), men: 42 hours per

week: women: 34 (82%). The ratio is greater for educated women.

Hours of work

In 1990: 29% of working women PTs vs 11% of men. In 2010: 25%. Women are 70% of PTs (since 1970s). 15-24: school. 25-44: family responsibilities.

Hours of work

In gral.Involuntary PTE rates are similar (26 of FPTs

vs 31% for men )Men more likely to be PT because of school.Women more likely b/c family responsibilities

(17% of FPTs vs 2% for men).That means: 5% of women in the LF work PT

b/c of family responsibilities; 0% of men in the LF work PT b/c of family responsibilities