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Human Capital and Signaling - YouTube
Channel: Marginal Revolution University
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- [Alex] As we discussed
in the last video,
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people in the United States
are very lucky
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to be able to work
in a productive economy,
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an economy that raises their wages
well above the world average,
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regardless of skill.
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Within the United States,
however, or any country,
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some workers have
relatively low wages
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and others much higher wages.
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Let's take a look
at one of the reasons why.
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As we saw in the last video,
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people in the United States
are very lucky
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to be able to work
in a productive economy
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that raises their wages
well above the world average,
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regardless of skill.
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Within the United States,
however, or any country,
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some workers have
relatively low wages
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and others much higher wages.
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What accounts for these differences?
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Well, one reason is differences
in human capital.
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Physical capital is things like tools
and tractors and software,
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things that make people
more productive.
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Human capital is tools of the mind,
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the stuff in people's head
that makes them productive.
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And just as with physical capital,
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producing human capital requires
investment, training, experience,
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and especially, formal education.
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Let's take a closer look at the effect
of education on earnings.
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So here's some data
on the association
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between education
and earnings level.
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In modern times,
somebody without a degree,
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without a high school degree,
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they're earning
just over $20,000 a year.
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High school graduates
may be about $30,000
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or a little bit more than that.
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Somebody with a bachelor's degree --
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they're earning more than average,
about $50,000 a year, on average,
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even more with a master's
or a professional degree.
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Moreover, what the data
on the right shows
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is that the return
to a college education
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has increased over time.
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During the 1960s
and the 1980s, for example,
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people who had a college degree,
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they did better than people
with a high school degree.
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They earned about 1.5 times as much.
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Over time, however,
that ratio has increased,
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so now people with a college degree
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earn about double what people
with a high school degree earn.
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So it's important for wages
to have an education,
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and it's increasingly
important over time.
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Why has the return
to human capital risen so much?
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Some economists believe
that it is the ability
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to work with computers.
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Workers who were able
to take advantage
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of information technology,
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workers whose skills
are complimentary
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with computers
or information technology
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can become much more productive
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and to the extent that education
helps us to produce these skills --
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that would explain
a rising return to education.
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Globalization has
also made markets larger
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and that has helped
high-skilled workers.
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In the world, as a whole,
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high-skilled workers are scarce,
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but relative to the rest of the world
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the United States has a lot
of high-skilled workers.
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So globalization has increased
the returns to the scarce factor --
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high skill,
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and that has worked in favor
of U.S. workers, on average.
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At the same time,
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globalization has been less good
for low-skill U.S. workers
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who now find themselves
in competition
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with low-skilled workers
from the rest of the world.
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Keep in mind
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that one reason the college
to high school wage has gone up
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is that the earnings
of college graduates have gone up.
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But another reason
is that the earnings
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of high school graduates
haven't gone up,
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or indeed have gone down a little bit.
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So for all of these reasons
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human capital is becoming
more important.
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Not any human capital pays, however.
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The returns of different
college majors differ dramatically.
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So over here on the left, we see
the highest paying college majors.
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These are the median
lifetime earnings,
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and what you can see over here
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it's engineering,
engineering, engineering,
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engineering, engineering.
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It doesn't matter
what kind of engineering --
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chemical engineering, aerospace,
electrical, mechanical, civil,
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and so forth.
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You get the idea.
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Economics actually does really well.
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It's the highest paid degree
outside of kind of the STEM degrees.
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Here's the average,
and down here are the degrees
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which pay less
than the average degree.
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So here is the liberal arts.
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Here, for example,
is a psychology, art history,
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music degrees,
studio arts, and so forth.
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These degrees are going to pay less.
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They're still going
to pay more, however,
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than being a high school graduate
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and quite a bit more
over a lifetime,
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but it does matter what kind
of degree that you get.
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Even though chemical engineers
earn more than art history majors,
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you might be surprised
that art history majors
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earn more than high school graduates.
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Why is this?
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After all, most art history majors
don't get a job
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in which they use
their knowledge of art history.
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One reason is that
not all of the return
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to earning a college degree
is due to human capital.
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Rather than increasing productivity,
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a college education
may simply signal
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that the person getting the degree
has certain attributes,
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perhaps IQ, conscientiousness,
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ability to work with others,
grit, and so forth.
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Education in this view
is like competing in a triathlon,
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an Iron Man.
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Competing in an Iron Man
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won't increase your productivity
in a sit-down office job,
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but you may want to put
that accomplishment
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on your resume anyway,
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because it does signal
that you are determined,
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and also healthy by the way.
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One interesting piece of evidence
that signaling is important
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is that a large part of the return
to a college degree
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comes on the day
that you get your degree.
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This is often called
the "Sheepskin Effect,"
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because diplomas
used to be written on sheepskin.
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So think about two students,
two workers,
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one of whom has a four-year degree -
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they've completed it,
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the other of whom
has all the same courses,
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except they're missing
just one credit hour.
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They don't have the sheepskin.
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In terms of learning, these students
ought to be virtually identical.
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They're human capital.
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It's nearly identical and yet,
on average, the one with the degree,
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the one with the sheepskin,
earns more, a lot more.
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The signal of completion
seems to matter more
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than the learning.
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So there's an important lesson here,
and that is: finish your degree.
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If you don't finish your degree,
you may end up with a lot of debt
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and very little to show for it.
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That's the lesson
of the Sheepskin Effect.
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Okay, next we'll turn to looking
at compensating variations,
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and then we'll move on
to discrimination.
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- [Narrator] If you want
to test yourself,
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click, "Practice Questions."
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Or if you're ready to move on,
just click, "Next Video."
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