Human capital V

Another type of cost of attending college is the opportunity cost of the earnings from work received by the high school graduate that the college student could have been making. The size of this cost depends on the earnings that a high school graduate is able to make and whether or not the person in college works full-time or part-time while in school. The opportunity cost of attending college may extend several years beyond age 22 if the college graduate begins work at a lower salary than what the high school graduate is earning at age 22. This might well be the case since the earning of the high school graduate will have benefited from four years of experience and training.

Human capital IV

The benefits and costs of attending college are readily identifiable. The direct or out of pocket costs of going to college include payment for tuition, books and other fees. The cost of room and board are not counted since these are incurred even if the person is not enrolled in school. The amount of the direct costs depends on whether the individual attends a state- supported school or a private school. In addition whether he or she obtains a scholarship or tuition waiver.

Human capital III

To make the discussion more attractive, attention focuses on one particular type of human capital investment - whether or not to attend a four-year university or college. The principles we point to here apply to investment in all types of education and training.

Should an individual attend college? From a human capital point of view the answer depends on the monetary benefits relative to the costs. There are two different strategies to the precise nature of these benefits and costs. Strategy one is to finish high school and then begin full time work at age 18 working continuously until age 65 which results in the age/earnings. The second strategy is to attend college for four years from age 18 to 21 then work continuously from age 22 to retirement at age 65.

Human capital II

When is an additional year of education a good investment? The quotation from Adam Smith provides the answer, “whenever the increased benefits both pay back the initial costs and yield a rate of return at least as high as alternative investments of one’s time and money”. A major contribution of the human capital theory developed by Becker and others is to take this insight of Adam Smith and show how it can be used to measure the private and social rate of return not only to education but also to numerous other labor market activities.

Human capital I

The types of human capital investments that have received the most attention from labor economists are education and training. While schooling is partly a consumption good for many people (that is individuals pursue an education for the pleasure and satisfaction of experience) it is also treated by most individuals as a clear investment in their future. Every college student for example is aware of the costs of pursuing a college degree. These include the direct costs of tuition, books and other educational expenses and the indirect or opportunity costs in the form of forgone earnings from work that are sacrificed to attend school. Counter balanced against these costs are the anticipated benefits of increased earnings, more attractive employment opportunities and higher status and social prestige.

Is education a good investment II

The answer to this question is more complicated because it requires a comparison of both the increased earnings from additional years of education and the additional costs. Although a college education still opens the way to a higher paying job for most people the return to this investment is being squeezed both by the rising costs of obtaining the degree and by the relatively smaller wage advantage that a college degree now commands in the market.

Is education a good investment I

Is there any truth to the old adage, ‘If you want to get ahead then get an education?’. Many graduates now have joined the unemployment ranks and would have a knee jerk response to this economy.

Is education a good investment? At first glance it would certainly seem so since the earnings a person can expect to obtain in the labor market increase rather markedly with higher levels of education.

Competitive market?

How closely does the labor market for the following types of workers approximate a perfectly competitive market? What if any are the major imperfections in each market?

Does a migrant farm worker get competitive wage rate or will he/she get whatever the farmer dictates?

Does a steelworker get competitive wage rate or whatever the corporation dictates?

Does a nurse get competitive wage rate or whatever the hospital sets?

Does a bank executive set his own wage rate - and if so why?

If we look at those who got their wages set by others then the obvious question would be why are they not able to dictate the wage rate?

Rate of pay

Every large firm has a personnel department responsible for setting specific rates of pay for each job. In performing this function, how much discretion does the personnel department have in terms of rates it sets? To what extent do outside market forces impinge on this decision? For what type of jobs would market forces leave little room or much room for discretion?

Steel plants

In recent years a large number of steel plants in Pennsylvania have closed. How can we illustrate the impact of this development on the Pennsylvania labor market? How, if at all will the labor market return to equilibrium? Is the presence and persistence of high unemployment in Pennsylvania consistent with the rest of the country?

Internal wage II

Firms often use job evaluation techniques to set precise wages for jobs in the internal labor market. Individual rates of pay for workers with similar jobs are then determined by the type of compensation system used by the firm such as piece rates, time rates, profit-sharing (which is misleading since all the profits go to share holders and upper management not blue collar) and so on.

Internal wage I

If the labor market were perfectly competitive the firm’s internal wage structure would be dictated by demand and supply in the external labor market. Many firms have an internal labor market rate of pay somewhat sheltered from outside competition. Wages  for port of entry jobs at the bottom of the job ladder are largely market determined however within the internal labor market the specific nature of job skills creates a vague in wages.

Corporations view

Driven by the need to reduce costs and increase flexibility many corporations have replaced thousands of regular employees with temporary workers and part-timers or have bid-out the work to smaller subcontractor firms. This brings two advantages - one is that the contingent workers cost less, partly because their hourly pay is often only half  that of regular employees partly because they receive far fewer fringe benefits such as paid vacations and health insurance. A second benefit of contingent employees is that they can be easily let go when the company no longer needs them in effect turning the quasi-fixed cost of regular employees into a variable cost.

Two tier work forces III

The greater economic inequality among ‘insiders’ and ‘outsiders’ is a sense that one group of workers is destined to live with a revolving door of contingent work while another enjoys the security of high pay and permanent jobs. However the management’s rhetoric is that a size able portion of contingent workers choose temporary or part-time work in order to gain job experience or more flexible work schedules.

Two tier work force II

Recently many companies are subcontracting work out that had formerly been done in-house. The USX Corporation, for example lowered the number of in-house hours of labor needed to produce a ton of steel from 10 in 1982 to 2 in 2010, in part by subcontracting out maintenance-type jobs. Rather than pay a pipe-fitter a reasonable wage plus benefits the company got the same work done by a smaller company that paid its workers less than the minimum wage and provided no benefits.

Two tier work forces

Many firms driven by the need to reduce costs and increase flexibility have replaced thousands of regular employees with temporary workers and part-timers or have bid-out the work to smaller subcontractors. These practices by firms are not acceptable.

Two tier work forces

Japanese companies are famous for their two-tier employment systems composed of a ‘core’ group of permanent employees and a larger group of ‘contingent’ workers with little or no job security.

In many cases the ‘contingent workers’ are employed by subcontractors or work at home. In either case the result is something of a dual labor market structure where one group of employees have ‘good’ jobs providing high wages, extensive fringe benefits, considerable opportunities for promotion and job security, while another group of employees have less desirable jobs paying low wages with few fringe benefits and providing little if any job security.

Dual labor market III

The financial returns to years of education and experience should differ significantly depending on whether the individual is employed in the primary or secondary sector.

Two persons with identical years of education would have very different lifetime levels of income if one were hired into an entry level position in the primary sector and another were forced to work in a secondary job. Not only would the level of income differ between the two so would the rate of increase of earnings with additional years of experience. Therefore the primary worker moved up the job ladder in the internal labor market and the secondary workers’ earnings stagnated in a dead-end job.

Dual labor market II

If you believe economists then a simple question would suffice of why poverty has not been resolved till today? Why are jobs being shipped abroad? It is obvious these economists can overlook the firms in their pursuit for higher profits.

If the jobs are being shipped abroad then there are no wages, no working conditions, no employment stability, no chances of promotion and definitely no equity and due process. One wonders why they are over these facts.

Dual labor market I

Inner city workers have low wages and poor prospects because they lack human capital  necessary for high productivity and high earning in the labor market. That is the point of view of many economists, which we do not agree with since this single track thinking points the finger towards the labor. However they neglect to point the finger towards the firms. 

Then they would throw you off the tracks by claiming the solution to poverty in their perspective is improved by educational systems and job training programs for inner city residents so that these workers can leave low wage jobs and compete in higher wage jobs.

Labor market segmentation

The idea of labor market segmentation is that strong barriers to entry prevent certain groups of workers from effectively competing for jobs in a given market. These barriers may take several forms. 

One is the internal labor market which prevents workers in the external market from competing for job openings above the entry level in the firm. A second is discrimination which causes workers of certain race or sex groups to be excluded from competition for desirable jobs.

Segmented labor

Segmented labor market theory is one of the basic assumptions of the perfectly competitive model which is that all jobs in the labor market are open to competition. This does not mean that a waitress can quit her job and immediately become a doctor or that an unskilled laborer can effectively compete for an ironworker’s job since each person’s sphere of competition is limited in the short run by his or her education, job skills, geographic location and mental and physical abilities.

The presumption of competitive theory however, is that the walls separating labor markets are relatively porous so that workers given enough time to acquire the training or to move to a different city can effectively compete for jobs on an equal footing with persons already in that labor market.

Gain sharing

The central feature of gain-sharing is that at least a portion of employee pay is directly tied to some objective measure of firm performance such as profits, productivity growth or cost reduction.

The most prevalent type of gain-sharing program is profit-sharing which has several attractive features. First it stimulates employee job performance by giving each worker a direct stake in the amount of profit earned by the firm. Second it increases employee pay without raising base wages - this saves the firm money since cost-of-living adjustments and merit increases are typically awarded as some percentage of base wage. A third advantage is that the firm’s labor cost becomes flexible in the downward direction since the profit sharing component of employee compensation will typically fall during a recession.

Profit sharing also has disadvantages such as that in the firm it is more difficult to administer than straight time wages. In addition another disadvantage is that it must reveal all of its cost and revenue data to employees and important drawback to the management. That is what was done to the Detroit Auto industry who accepted a government bailout.