Question

Suppose people with 15 years of schooling average earnings of $60,000 while people with 16 years of education average $66,000.

(a) What is the annual rate of return associated with the 16th year of education?

(b) It is typically thought that this type of calculation of the returns to schooling is biased, because it doesn’t take into account innate ability or innate motivation. If this criticism is true, is the actual return to the 16th year of schooling more than or less than your answer in part (a)?

(c) Suppose the skills acquired in school depreciate over time, perhaps because technological change makes the things learned in school obsolete. What happens to a worker’s optimal amount of schooling if the rate of depreciation increases?

Answer 1

a)

one additional year of schooling gives $6000 more in every subsequent year. Thus the Annual rate of return (ARR) associated with 16 th year of education = 6000/60000 * 100

= 10%

b)

It is argued that people who are innately skilled or motivated pursue more education than those who are less innately skilled or motivated, because the cost (psychic and in terms of the time spent in college) are less for the innately skilled or motivated. If true, then the returns to education are over estimated

C) if the rate of depreciation is high or very high , the payoffs to educational institution will decline. and as a result the workers optimal amount of schooling will also decline as benefits from education erodes rapidly.