Econometric Studies in Human capital Theory - Essay Example

Module Human Capital Theory The wage differentials and human capital framework has always been the debate of microeconomics decisions and policy making. As Adam Smith stated in his theory of wages and profits, wages of labour vary with the labour skills, ease and hardship of the work (Smith et al 1730). Yet human capital is another doctrine which states that human capital is an investment which requires cost and pay premium return over the lifetime whether they are monetary or non-monetary. Over the past couple of decades, many researches and extensive literature have evolved. The core assumption prevailing under this doctrine suggests that high schooling yield higher returns though there has been a conflict in selection of specific model and factors which affect returns to schooling. Review on Econometric Studies David Card in his study explored the causal relationship of education on earnings. The research was a large scale study partly granted by NICHD (1801). He examined the heterogeneous returns of schooling through theoretical and econometric modelling. Besides he used institutional feature of an individual’s study which shape returns and explicitly the study analysed the heterogeneity between schooling of twins in contrast to their earnings. Card adapted the human capital earnings function (Mincer) which presumably could decompose the periodic earning into a linear functional form also known as simple statistic model. His study used the pooled sample of men and women standing up to 198,075 aged from 16 – 66 during the years 1994 to 1996. In this given time frame, the study targeted the differences between individuals having 10, 12 and 16 years of schooling to their returns. An OLS regression analysis were used to inspect the human capital earning with variety of hourly, weekly and annual earnings (Card, 1807). The study findings explored an interesting impact of an instrumental factor family background on the schooling and earning of their children which had 30% variation in the earnings, similarly college education differences and location near college or university had some significant influence over schooling and hence earnings while birth season was only insignificant instrumental factor. It is worth mentioning that twins are considered identical while the OLS estimator results by Card posed a difference of around 10% in the earnings of twins. Furthermore the earnings of certain subgroups who had external structural influence on their schooling were higher than average individuals as a whole. It can be stated that Card focused more on the schooling differences leading to heterogeneous earnings yet revealed some interesting dimensions too (Card, 1830). Much of the literature that examines returns to schooling usually consider academic qualification while in Dearden et al., 2002 she applied econometric model using OLS estimation on returns to academic as well as vocational qualification in Britain. This study is a longitudinal study funded by the then DfEE whereas the sample data of National Child Development Study (NCDS), 1991 and Labour Force Survey (LFS) of 1998 has been used. Her study examines the varying aspects of gender, ability, qualification and family background too. This longitudinal study develops a framework where NCDS results were compare with LFC statistics while after some selection criteria a final sample size of 6867 individuals (3007 Male & 3860 Female) was processed through estimation. Estimation results identified that males with O-Levels/ GCSE earn 13 to 23% premium to their qualification while for A-levels they earn 18% and for a degree they yield 11 to 32% premium. In contrast to men, women with O-levels/ GCSE earn 11 to 21% premium and with A-levels it adds to 20% and for degree women return 30% premium to the qualifications in a year. The study confirmed that along with academic qualifications, if individuals acquire vocational qualifications their premium may rise by 40% but vocational qualifications alone have reported less premium (Deardan et all, 262). Apart from returns on qualifications, the research identified a difference between male and female premiums to their qualifications where female earn less to their schooling. Further continued study analysis to the same domain were presented in Mcintosh, 2006. He used the sample data of Labour Force Survey during the period 1996 to 2002. His study also applied econometric model using OLS estimator after reducing biases and error. The sample size stood at 15,000 individuals. His study aimed to focus the changing patterns of return to schooling. The results revealed an identical premium return to both males and females. Yet the variance of qualification confirmed heterogeneous returns among O-levels, A-levels and degree level labour force. Furthermore, the vocational qualification as identified earlier at lower premium to academic qualification remained the same (M cintosh, 240). Investing in human capital is a private decision which affects the return to schooling; so, every additional qualification adds up the return “(Dickson, Matt, and Sarah Smith. What Determines the Return to Education: An Extra Year or a Hurdle Cleared?)”. Following the human capital theoretical framework 2003 “(Harmon et al., The Returns to Education: A Review of Evidence, Issues and Deficiencies in the Literature)” conducted microeconomic empirical investigation on the returns to schooling. He concluded that every investment reflects the size of returns. Harmon used a comparative approach to analyse cross sectional returns on education and furthermore, he applied OLS estimation analysis using dataset acquired from International Social Survey Program (ISSP). The results revealed relative differences among the twenty five countries mostly from European Union (EU) such as Ireland, UK, Italy, Germany, Greece, Norway and Switzerland based on their microeconomic wage circumstances. The overall average return to schooling through OLS statistics was concluded around 6 to 11% international (Colm, Hessel and Ian). Since the investment in human capital is an independent business, any intervention in schooling decision has reported adverse impact in his study. Conclusion After extensive literature review, it can be stated that to examine the returns on schooling, an econometric study can best explain the causes of higher returns either that is family background or ability or academic qualification (college graduation, O-levels, university degree) or vocational qualification or training. Whatever the advantage one has that makes him special to earn more return can only be evaluated by OLS estimation. As far as the theoretical model is concerned, I believe the model derived from human capital framework will be suitable for this study to analyse the return on education in UK. Human capital doctrine advocates every additional qualification help yield more return to individual schooling as spending on human capital is an investment which gives lifetime profit. W = ?Xi + ?Si + ?xi + ?xi2 + € Where w is earning to an individual S represents the schooling x is an experience/ skills X represents other factors which affect earnings X2 represents the quadratic term to capture concavity of experience over time adding to experience profile. Work CitedTop of FormBottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of FormTop of FormCard, David. "The Causal Effect of Education on Earnings." Handbook of Labor Economics : Volume 3a / Edited by Orley Ashenfelter and David Card. (1999). Print. Top of Form Dearden, Lorraine, Steven McIntosh, Michal Myck, and Anna Vignoles. "The Returns to Academic and Vocational Qualifications in Britain." Bulletin of Economic Research. 54.3 (2002): 249-274. Print. Bottom of Form Bottom of Form Top of FormTop of FormDickson, Matt, and Sarah Smith. What Determines the Return to Education: An Extra Year or a Hurdle Cleared?Bonn: IZA, 2011. Internet resource.Bottom of Form Bottom of Form Harmon, Colm, H Oosterbeek, and Ian Walker. The Returns to Education: A Review of Evidence, Issues and Deficiencies in the Literature. London: Centre for the Economics of Education, London School of Economics and Political Science, 2000. Internet resource. Top of FormBottom of FormTop of FormTop of FormM, cintosh S. "Further Analysis of the Returns to Academic and Vocational Qualifications." Oxford Bulletin of Economics & Statistics. 68.2 (2006): 225-251. Print,Bottom of Form Smith, Adam, Edwin Cannan, and Max Lerner. An Inquiry into the Nature and Causes of the Wealth of Nations. New York: The Modern library, 1937. 1723-1770. Print. Bottom of Form Top of Form Bottom of Form . Read More