Problem Set # 3
Human Capital
1.a. Using a 10% rate of interest, calculate the present value of $2000 to be received one year from now.
Future Value/Discount rate = Present Value
2000/(1.10)=1818
b. Using a 10% rate of interest, calculate the present value of $8000 to be received five years from now.
Future Value/Discount rate = Present Value
8000/(1.10)5 =4965
c. Using a 10% rate of interest, calculate the future value of $1000 two years from today.
Future Value=Present Value(Interest Growth)
1210 = 1000(1.10)2
2.Conjure up one example of job skills that would be general and another example that involves skills specific that are specific to one employer.
There are too many examples here to suggest all…but note that general skills are those that are useful to many employers, while those that are useful to one or only a very small number of employers are specific skills. Narrow skills, are not necessarily specific, as specialists are often in broad demand. Likewise, highly educated individuals are not necessarily generally educated, as they may be specialists in areas that have few employers.
3.Explain why it is that employers are more likely to bear the majority of costs associated with skills that are job specific as opposed to skills that are more generally useful.
Because generally trained workers expect to be paid more than unskilled workers, they are willing to pay for their own training. Specifically trained workers, however, do not benefit from competition for the skills they have gained, and thus participate little in the returns from investments in these skills. This means that they have no reason to take pay cuts (or to invest in their training) when they see no long-term advantage from doing so. Thus, if firms want these skills they have to bear the brunt of the investment cost. If they share in the returns with their employees by giving them higher wages after training, they may be able to induce employees to pay some share of their training, but not so much as in the general skills investment case.
4.Employers often have policies in which they pay tuition for employees on condition that these employees remain with the firm for 1, 2 or 3 additional years. Explain this in terms of human capital analysis.
Usually this happens when firms pay for investments in their workers general skills. To prevent competitors from luring off their valuable trained employees, they may ask for long term employment contracts so that they can recoup on their investments in their employees.
5.Assume an employer is considering employing an individual who must be trained on the job, but the skills to be imparted are general. Assume that the value of this individual to his or her employer during training is three dollars per hour. Using human capital analysis suggest how the employer might adjust his or her plans if a minimum wage of $5 is imposed.
Under these circumstances we can expect a number of possible responses.