Question

Empirically-Oriented Questions Answer the below questions relating to the following table Labour Market Outcomes of Graduates and School Leavers, 2015 % Graduates % School Leavers Aged 25-29 41% 49% Aged 30-59 32% 54% Graduates School-leavers Graduates School-leavers 78.7% Employment Rate Hourly wages 10h percentile Median 90h percentile 88.3% 89.4% 83.2% £7.05 £12.36 £23.08 £6.25 £9.21 £15.93 £8.45 £17.31 £34.63 £6.53 £11.33 £22.13 Source: Blundell, Green and Wenchao (2016) Notes: Calculations are based on Quarterly Labour Survey data for the UK using all four quarters of 2015 Graduates are defined as people with first degrees or higher qualifications. School leavers are defined as people with at least GCSE grade C or equivalent qualifications and without first degrees. School leavers include those with just A-levels or below degree level higher education qualifications 1. a) Calculate the gross rates of return (in percentage terms) for graduate employees for all six groups in the table (i.e. 2 age categories* 3 points in wage distribution. You can also assume that graduates invest in 3 years of post-compulsory education) Which group has the highest rate of return? Which has the lowest?

Answer 1

GROSS RATE OF RETURN:
Gross rate of return is the total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted over a specific period of time, such as a month, a quarter or a year. Empirically, gross rate of return on an investment is one measure of an investor’s profit. It typically includes capital gains and any income received from the investment.

The rate of return is the amount you receive after the cost of an initial investment is calculated in the form of a percentage. The percentage can be reflected as a positive, which is considered a gain or profit. When the percentage is negative, it reflects a loss. This information is very useful in determining whether or not the initial investment you made was a good one. There are many reasons why it would be advantageous to know the rate of return on your investment. After all, how would you know if your investment was a wise choice? Calculating the rate of return provides important information that can be used for future investments. For example, if you invested in a mutual fund that showed a substantial gain after several months of performance, you may decide to purchase more funds. If the fund showed a continual loss, it may be wise to conduct research to find a better-performing fund.

Another advantage of calculating the rate of return is that it allows you to gauge your investment and decision-making skills. Investments that create a gain or profit are great. However, if you continually make investments at a loss then you may want to change your investment strategies. A great attribute of successful business people is knowing how and when to make investments, as is to know when to change strategies. With a firm grasp of calculating the rate of return, you can manage and monitor your investments at various stages to determine the outcome of your investments. This leads to a higher level of confidence and the skills necessary to be a savvy investor.

The Rate of Return Formula:

The rate of return formula is an easy-to-use tool. There are two major numbers needed to calculate the rate of return:

Current value: the current value of the item.

Original value: the price at which you purchased the item.

Then, apply these values to the rate of return formula:

((Current value - original value)/original value) x 100 = rate of return

A simple calculation of gross return can be derived from the following equation:

Gross Rate of Return = (Final Value – Initial Value)/Initial Value x 100.

For comparison, the net rate of return deducts fees and expenses from the investment’s final value:

Net Rate of Return = (Final Value after Deducting Fees and Expenses – Initial Value)/Initial Value

The gross rate of return can be substantially different than the net rate of return, which deducts fees and expenses.  Remember, the outcome is always reflected as a percentage, so the formula requires you to multiply by 100 to get the percentage. If this percentage is a positive number, then you have a profit or gain on your investment. If the percentage is a negative number, then you have a loss on the investment.

1 (a) Let us calculate the gross rate of return percentage, using the Quarterly Labour Survey Data of UK for all four quarters of 2015.

Using the formula

rate of returns = ((Current value - original value)/original value) x 100

The Graduates had a higher percentage of rate of return with 102.88% while school leavers had a lower rate of return at 71.38%

(b) The rate of returns vary for workers located at different points in the distribution of wages as well as for the two age groups could be due to the following reasons.

External flows:  In the presence of external flows, such as cash or securities moving into or out of the portfolio, the return should be calculated by compensating for these movements. This is achieved using methods such as the time-weighted return. Time-weighted returns compensate for the impact of cash flows. This is useful to assess the performance of a money manager, where typically the clients control these cash flows.

Fees:  To measure returns net of fees, allow the value of the portfolio to be reduced by the amount of the fees. To calculate returns gross of fees, compensate for them by treating them as an external flow, and exclude accrued fees from valuations.

Money-weighted rate of return: The time-weighted return, the money-weighted rate of return (MWRR) or dollar-weighted rate of return also takes cash flows into consideration. They are useful in evaluating and comparing cases, where the money manager control cash flows.

2 (a) The figures provided not necessarily provide accurate estimates of the gross rates of return to having a degree could be due to return measures the increase in size of an asset or liability or short position.  A negative initial value usually occurs for a liability or short position. If the initial value is negative, and the final value is more negative, then the return will be positive. In such a case, the positive return represents a loss rather than a profit.  If the initial value is zero, then no return can be calculated. The return, or rate of return, depends on the currency of measurement.  Without any reinvestment, a return R over a period of length t is equivalent to a rate of return. i.e R/t.

Assuming gross returns are reinvested; however, due to the effect of compounding, the relationship between a rate of return r, and a return R over a length of time t is:  1 + R = (1 + r) ^t.

(b) The employment rates are higher for graduates because of

External flows:  In the presence of external flows, such as cash or securities moving into or out of the portfolio, the return should be calculated by compensating for these movements. This is achieved using methods such as the time-weighted return. Time-weighted returns compensate for the impact of cash flows. This is useful to assess the performance of a money manager, where typically the graduates control these cash flows.

Fees:  To measure returns net of fees, allow the value of the portfolio to be reduced by the amount of the fees. To calculate returns gross of fees, compensate for them by treating them as an external flow, and exclude accrued fees from valuations.

Money-weighted rate of return: The time-weighted return, the money-weighted rate of return (MWRR) or dollar-weighted rate of return also takes cash flows into consideration. They are useful in evaluating and comparing cases, where the money manager control cash flows.

The key difference between signalling and human capital models is that signalling models allow firms to draw inferences about unobserved characteristics of workers. Those inferences can be based on the schooling or work experience of workers, or on direct measures of some aspects of job performance. Many recent empirical findings can be better explained by signalling models than by human capital theory. Given the explanatory power of signalling models, standard estimates of the social return to secondary schooling are in large part capturing differences in affective traits, such as perseverance, which were acquired either in primary school or at home.

The human capital and signalling explanations, identify in the theoretically-oriented environment, imply for government policy towards higher education. Human resources are sometimes considered a "soft" industry, because it cannot always provide quantifiable financial data about its workload and does not typically create revenue either. Investment in HR can make executives nervous because projects and programs often provide no tangible results -- although the idea of "improved morale" or "greater employee satisfaction" seems like a good thing, whether that translates to a significant increase in revenue or improved productivity remains questionable. Calculating the return on investment provides a way for HR professionals to demonstrate the worth of the profession.  We often hear that people (human capital) are the most important assets of any organization and the success of an organization largely depends on the management of its human capital. Yet,
in today’s organizations there is a strong focus on controlling the bottom line. Common financial metrics that are used to determine these financial results include:
• Net Income
• Gross Profit Margin
• ROI (Return on Investment)
• EBIT (Earnings Before Income Tax)

To gain and maintain credibility at the executive table, it is increasingly important for Human Resource management to present support for their Human Capital Management strategies in a manner that is similar to those used to support Financial and Structural Capital.  Progressive Human Resource Executives have recognized that using Human Capital Metrics, to support business decisions provides direct links to organizational results in quantitative terms that are readily understood by other executive decision-makers.  The Human Capital Metrics provide a focused diagnostic to determine where new or improved human resources solutions need to be developed in the organization. Once new strategies are identified and implemented, the cycle of measurement starts again. The results of new initiatives are measured against the expected results as well as industry benchmarks and strategies are then further refined. This cycle can also be referred to as a Value Creation Chain.

Education is one of the most important determinants of wages at the individual level. Returns to a year of schooling are estimated to be positive and large in most countries, ranging from 2 to 20 percent around the world.  Two theories exist, which attempt to explain the causal relationship between education and earnings. These theories hypothesize about
the specific mechanism through which education affects earnings. Human capital theory argues intuitively that education endows an individual with productivity-enhancing human capital, and that this increased productivity results in increased
earnings in the labor market. Competitive market theory does, after all, require that laborers receive a wage equal to their marginal product. Signaling theory proffers an oppositional argument, which holds that education only reflects inherent human capital. This inherent human capital, not education itself, is what increases productivity and leads to higher wages, and it likely measures a combination of intelligence, motivation, and educational background.