Question

I need solution for this issue with all the details, and help me with all the details? BR/Ha

Q.) This question is about human capital accumulation.

a) What do we know about the correlation between educational attainment and various labour market outcomes? Consider the
following outcomes in turn: unemployment, labour force participation, and earnings.

b) Explain the concept of ‘ability bias’.

c) Discuss schooling as a signalling device.

Answer 1

A) There is a very strong connection between educational attainment and labor market outcomes. Educational attainment is often used as a measure of the skills available in the population and the labor force. Higher levels of educational attainment typically lead to greater labor participation and higher employment rates. Labor market outcomes are assessed mainly using different employment/ unemployment rates but also considers elements of wages and earnings. Thus these two are always positively correlated. Due to technological advancements, people with higher skills are more in demand. So, this is easy to understand that unemployment rates fall with higher educational attainment.

Now, when we talk about human capital, it means the stock of knowledge that a particular worker has which contributes to his/her productivity. The Human Capital theory argues that education proclaim skills that serve to increases the productivity of an individual. Thus more productive individuals are able to generate a higher output which naturally translates into higher wages and better employment opportunities.

The prospects of an individual’s employment depend largely on the requirements of labor markets and on the supply of workers with different skills. Unemployment rates thus indicate what the education system produces and what skills the labor market demands. Unemployment rates varies by gender, age and area of living other than level of education. Those with lower educational qualifications are at particular risk of economic marginalization since they are both less likely to participate in the labor force {labor force includes all persons who are either employed or unemployed. Its participation rate refers to the labor force as a percentage of total population. Persons who are not in the labor force are considered as economically inactive (e.g. children, retired persons or persons not seeking employment for other reasons)}. In most of the developed or developing nations, there would be positive relation between labor force participation and educational attainment. Similarly, earnings are also positively related to education and skills. It is widely believed that education affects people’s economic status by raising their earnings in the labor market via improving access to employment or, conditional on employment, via promoting entry into higher paying occupations.

b) Ability bias means that high ability employee do better in labor market, but for gaining higher ability they need to be more educated. There is one problem associated to this i.e. employers have some ability to detect these valued characteristics, people with more education would have earned above-average incomes even if their education were only average. Thus, Standard estimates overstate the effect of education on worker productivity and income.

C) Signalling theory states that the potential employees would opt to send signal about their ability level by acquiring better educational credentials. While the education by itself may not enhance the productivity or skill of an individual, it conveys an informational value to the prospective employers about the ability of the individual. If the role of education is merely limited to signal the ability of an individual and not to enhance his productivity, education can be considered inefficient form of signalling. Standard estimates overstate the effect of education on worker productivity, but not the effect on income.