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The Evolution of the Returns to Human Capital in Canada, 1980-2005

The Evolution of the Returns to Human Capital in Canada, 1980-2005. Written by: Brahim Boudarbat, Thomas Lemieux, and Craig Riddell. Analyzed by: Mico Radulovic, Ben May, Dajana Sormaz, Bryan Taylor, and Arjun Arulambala . Introduction. Returns to education Returns to experience

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The Evolution of the Returns to Human Capital in Canada, 1980-2005

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  1. The Evolution of the Returns to Human Capital in Canada, 1980-2005 Written by: Brahim Boudarbat, Thomas Lemieux, and Craig Riddell Analyzed by: Mico Radulovic, Ben May, Dajana Sormaz, Bryan Taylor, and Arjun Arulambala

  2. Introduction • Returns to education • Returns to experience • Controlling for work experience

  3. Some Background to the Problem • Existing Canadian literature such as Freeman and Needels (1993) and Burbidge, Magee, and Robb (2002) try to explain the returns to education but are unsuccessful at clearly presenting their findings and leave confusion among the reader. • The existing papers agree upon two main beliefs • The belief that for the labour force as a whole the gap between more-and less-educated workers remained stable during the 1980s and 1990s • The belief that the relative demand for more educated workers increased since the late 1970s.

  4. Data Source • Canadian Census from 1981-2006 • Weekly wage and salary earnings of full-time workers aged 16-65 • Inconsistency of Survey of consumer finances (SCF) • Restricting study of recent developments

  5. Methods • Attention focused on the private benefits to the individual in the form of higher earnings and employment • Price dimension is used • Referred to as “skill premium”

  6. Methods (Cont’d) • Workers are classified into five groups • less than a high school diploma • high school diploma • post-secondary degree or diploma below a university bachelor’s degree (including trade certificates) • university bachelor’s degree • postgraduate degree (master’s, PhD, and professional degrees)

  7. Methods (Cont’d) • Returns to education • High school graduate earnings used as base • Workers are placed into their category irrespective • Both raw or unadjusted and adjusted results displayed • Adjusted results are either controlling for experience and age or education • Different from previous studies, since they do not control • Results reported based on weekly wages and salary of full time workers

  8. Methods (Cont’d) • Returns to experience/age • adjusted wage gap are calculated by regressing log wages on a set of age dummies • the regression also controls for education using dummies for the five education categories • men aged 46-55 are chosen as reference category

  9. Methods (Cont’d) • Median measures are relatively unaffected by increases in returns to education by workers in the top part of the wage distribution • Therefore, both means and medians are reported in this study • Results show differences between the two are small

  10. Measuring Returns to Human Capital • Human Capital refers to the skills, knowledge and competencies of individuals. • Two key factors that influence an individual’s Human Capital; • Formal education • Work experience (age) • Main focus will be the impact of formal education and work experience has on an individuals private benefits. • Methods to analyze the results • Average treatment effect on the treated (also known as average return) • Marginal return • Price dimension • Quantity dimension

  11. Returns to Education

  12. Returns to Education (Cont’d) • Sharp increase in the return for BA graduates over the past 25 years • The earnings of those with postgraduate and professional degrees are fairly stable over the 25-year period • Upward trend in the return to a post-secondary diploma • The earnings difference for high school graduates and men with less than a high school diploma widened in recent years

  13. Returns to Education (Cont’d)

  14. Returns to Education (Cont’d) • For all educational categories except university BA graduates, controlling for differences in experience decreases the return to education • The earnings differential between high school graduates and non-graduates becomes much larger when adjusting for differences in work experience • Younger cohorts are more highly educated, and this generates a negative correlation between schooling and experience

  15. Returns to Education (Cont’d)

  16. Returns to Education (Cont’d)

  17. Returns to Education (Cont’d) • The main differences from the results for menare: • The returns to education for women are larger • The adjusted education wage differentials among women were more stable from 1980-2000, though they did widen between 2000 and 2005 • The earnings associated with a post-secondary diploma and a postgraduate education increase throughout the 25-year period • The adjusted gap between high school graduates and non-graduates is stable between 1980-2000, and widens in 2005 • Controlling for work experience has the largest effect on those with less than a high school diploma, and the smallest effect on those with a postgraduate education • The adjusted wage differentials also reveal more of an upward trend than the corresponding unadjusted results

  18. Returns to Age/Experience

  19. Returns to Age/Experience (Cont’d) • Substantial expansion between 1980 and 1995 in the wage gap between younger workers (16-25) and older workers (26-35) • After 1995, relative wages of younger workers stabilized • Between 1995 and 2000 there was a market reversal of earlier trends as relative earnings increased • After 2000, however, most of this improvement in relative earnings is given up

  20. Returns to Age/Experience (Cont’d)

  21. Returns to Age/Experience (Cont’d) • The large gap in the growth in earnings for younger and older workers is less dramatic when looking at the adjusted results • The reason for this is because of a slowdown in growth in education attainment among Canadian men born after 1950

  22. Returns to Age/Experience (Cont’d)

  23. Returns to Age/Experience (Cont’d)

  24. Returns to Age/Experience (Cont’d) • Similar to the results for men, females have a substantial growth in wage inequality by age over the 25-year period • Between 1995 and 2005, these differentials widen further for women • Although the earnings gap between younger and older workers increases more for women, the magnitudes of these gaps are larger for men

  25. Relation to Public Policy • Human capital theory deals with the very nature of what is the optimal choice of education levels • Study suggests that education alone does not determine wage differentials over time • Market wages play an important role • Public policy should focus on job creation and increasing incentive to obtain higher education

  26. Q&A

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