Education and
Wages
Pedro Telhado Pereira
May 2004
Part 2
Universidade da Madeira
1
What to include in costs?

Additional expenses that studying implies
fees
books
photocopies

Some aspects that been a student gives
should be discounted.
Example: free access to the internet that
be used to other ends than studying.
Universidade da Madeira
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No monetary benefits

work in a nicer and healthier environment.

longer and healthier life.

influence of next generation education.

….
Universidade da Madeira
3
Signal Theory
Let us assume that there are two kinds
of workers

more productive (+)

less productive (-)

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
The firms will be able to pay higher wages to
the more productive workers
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
Firms do not know who is more
productive and who is less productive.

All workers are going to say that they
are more productive as in this way they
will receive more.
Universidade da Madeira
6
More productive workers are
interested in giving a signal that they
are
The education system is set in such a
way that C(+) < C(-), making present
value of investment in education
positive for (+) and negative for (-).
 Educational system does the screening


Try to explain why, from the social point
of view, education looses its value.
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We have two theories:

Human Capital Theory – education
increases productivity.

Signalling (Screening) Theory –
education does the screening as more
productive individuals want to give a
signal.
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How do we test the theories?
1) comparing the return of selfemployed with employees;
 2) seeing if there is an increase of
return for finishing the grade –
sheepskin effects.
 3) returns to education in the private
and public sector.

… we will talk about testing it latter.
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9
So far we spoke of private returns
to education but we could be
interested in returns

1) For the State
– Education costs paid by the State
– Benefits – increase in taxes in the future,
less spending in health and social
problems...
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
2) Social
– Total costs = Private + State + other
institutions
– Total benefits - Private, State, other
individuals (externalities), future
generations...
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Training

1) General  This kind of training leads to na increase of
productivity independently of the firm or the
sector the worker is in. In this case workers
have to paid by their own productivity;
 If a firm pays below the productivity the
worker will quit
 This kind of training as to be paid by the
individual or the State..
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2) Specific training.
 Training that only increases the
productivity in the firm. Worker has no
incentive to pay for this training as he
will loose his investment if he gets fired.
 The firm can pay for this training as
latter it can pay the worker below his
productivity.

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Some notes:
Age is important as the younger an
individual does his education/training
more years he has to receive the
differential in wages.
 You should take in consideration the
probability of unemployment as studies
have shown that this probability
decreases with education.

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
Should we consider hourly, monthly or yearly wages?
• Individuals with more education tend to work longer hours per
day (as leisure is relatively more expensive)

Bias due to ability of individuals – wages and
schooling can depend on ability and therefore there
will be a bias if we estimate the above equation by
OLS.
– Natural experiments

Selectivity problems, specially in the female sample.
Universidade da Madeira
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