Post-School Human Capital Model (Productivity Investment (You can never…
Post-School Human Capital Model
Regression of wages against years of education (in-school human capital) and experience (post-school human capital)
Concave age-earnings profile
Earnings rise faster with each additional year of age/experience, but effect begins to taper off
Earnings always rise sharply in the first year regardless of level of schooling; this can boil down to experience
You can never lose your productivity, but you can increase it by investing time into increasing productivity
If you invest time into productivity,
You decrease your current period's earnings
You increase your productivity in the future
You increase your future period's earnings
Thus, investing in productivity is a trade-off between current and future earnings.
Investment into productivity should decrease with age.
When you are young, you have a longer future.
Thus, you can enjoy the benefits of investing in your productivity for much longer.
This leads to higher returns of investing in productivity.
Investment takes the form of not producing; it is "learning by not doing".
Competitive labour market workers pay for their own training.
Skills are general, so investment is useful for all types of jobs.
Skills that enhance productivity equally in all firms
VMP in 2nd period will be higher for all firms
; company has to pay w2 = VMP2
the worker must pay for the training.
Competitive firms provide general training only if they do not pay for it (i.e. the worker accepts a lower wage in exchange for being trained)
Otherwise, there is no incentive for the firm to train you: not only do they have to pay higher costs for training, they have to pay you higher wages
Skills that enhance productivity only in a firm that trained
VMP2 will be higher only for the firm that trained the worker
both firm and worker pay for the training.
w1 < VMP1
Worker earns w2 that is lower than VMP2, but higher than market wage.
Thus, it is not optimal for the company to fire the worker as w2 < VMP2.
It is also not optimal for the worker to quit as w2 is higher than market wage.
No firms/workers have incentive to terminate the contract
A company has a hard time and stops paying its workers
Workers would rather wait out than look for a new job
Last hired, first fired
More senior workers have more specific training
Thus, companies are more likely to fire newly-hired workers
Probability of job separation declines with seniority