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Signalling and Human Capital Model of Education: Study Notes

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Signalling and Human Capital Model of Education Some basic stylised facts Simple model of signalling: education and the labour market Clearly there are economic benefits to going to college (unive... rsity).  But what are the costs? o Direct costs: tuition fees, living costs, etc. o The opportunity cost: foregone earnings. Consider someone facing the above schooling-wage profile: earns wHS if stop at high school ($25,000 in the picture) and wCOLL if attend college ($30,000).  Question: what should this individual do? (Stop at HS or finish college?) We can derive the net present value of earnings if individual:  stops at high school versus:  stops at college. This is how it’s done: Net Present Value if choose High School option: ????? = ??? + ??? 1 + ? + ??? (1 + ?)2 + ⋯ + ??? (1 + ?)46, (2) On the other hand, Net Present Value if choose College option: ??????? = −? − ? 1 + ? − ? (1 + ?)2 − ? (1 + ?)3 + ????? (1 + ?)4 + ⋯ + ????? (1 + ?)46, Optimal decision: Choose College if ??????? > ?????, otherwise choose High School op[tion. Effects of Costs and Benefits” in the LazearGibbs textbook. If costs or benefits of education change, then this may change, e.g., the decision to enroll in university. E.g. if the rate of return to schooling (skills) rises, then more people may be induced into attending university. [Show More]

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