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Yields and Education
The basic form of personal income function can be deduced from simple empirical observation;People with greater training have higher salaries, remuneration increase with experience -although at a decreasing rate -and in certain sectors they pay more than in others.
Human capital theory offers us a theoretical corpus to understand why these phenomena happen and gives us a reason to include them in the regression model.
Gary Becker (1964) mainly analyzes 2 types of investment in human capital: training at work, which in turn is distinguished between general and specific and schooling. Here the analysis that Becker makes of the effects on the remuneration of the 2 main types of investment in human capital is summarized in summary.
When talking about human capital, it tends to relate in a very direct way this with formal education, and it tends to undervalue the training that is carried out in jobs.
A large part of the workers increase their productivity by acquiring new knowledge and qualifications while working, and improving the skills they already had.
The basic assumption is as follows: an increase in productivity has a cost, since if it had no associated costs there would then be an infinite demand for training. These costs can take several forms: equipment and materials that are used for training, cost of trainer personnel, and time of workers dedicated to training.
Suppose a model in which companies hire workers for a defined period and that they operate in a perfectly competitive goods and labor market. If work training did not exist, salaries would be determined outside the company as any other price. According to marginalist theory, a company that maximizes benefits would be in balance situation when marginal income was equal to marginal costs:
PMT = WT
Where PM is the marginal productivity obtained by the hiring of an extra worker, w the salary- marginal- worker and subscription "T" refers to the period. If w it were greater than PM, hiring would not occur and if PM were greater than W in a competitive market, more workers would be countered and salaries would go up to equal to PM.
These conditions change when training at work is incorporated and interconnection between income and future and present expenses is altered. The formation, being a cost, can increase the expenses present as mentioned above, in teams, trainers, etc. and also decrease the income from labor personnel dedicated to form and not produce. During each period the expenses do not have to be equal to wages, income does not have to be equal to maximum possible marginal productivity, and there will be a relationship between the expenses and income of all periods.
Given this case we can replace marginal productivity and salaries of the original equation for the updated value of income and expenses.
∑_ (t = 0)^(n-1) ▒RT/〖(1+i)〗^(t+1) = ∑_ (t = 0)^(n-1) ▒et/〖(1+i)〗^(t+1)
If the training took place only during the initial period the expenses during that period would be equal to the salaries plus the spending of the formation, the expenses during each of the remaining periods would only be equal to the wages, and the income of all periodsThey would be the same to marginal products. We have the following equation:
Pm0 + ∑_ (t = 0)^(n-1) ▒pmt/〖(1 + i)〗^(t + 1) = w0 + k + ∑_ (t = 0)^(n-1) ▒Wt/〖(1+i)〗^(t+1)
Where K represents the spending in training.
Note that we could extend the formation as many periods were necessary.
The following term is defined:
G = ∑_ (t = 0)^(n-1) ▒ (pmt-wt)/〖(1+i)〗^(t+1)
So we have to:
PM0 + G = W0 + K
As k represents only the spending in training does not completely measure costs, since it does not include the time that the person dedicates to their training and that could have dedicated to produce goods. The difference between what could have occurred, PM’0, and what is produced, PM0, is the time cost of time spent to training.
If C is defined as the sum of opportunity costs and training expenses, the equation is transformed into:
PM’0 + G = W0 + C
The term G, the excess of future income on future expenses, measures the performance for the company to provide training and, therefore, the difference between G and C measures the difference between the yield and the cost of the formation. According to the equation, the marginal product would be equal to wages during the initial period only when the performance was equal to costs, g = c.
Within work training we can distinguish between two types, general training and specific training.
The general training of workers is useful to many companies, a commercial manager of a bank that has acquired experience will increase its productivity not only in that bank but in any other one to work, the same happens with a doctor, a mechanicor whatever the profession.
On the contrary, specific training is one that is only useful within the same company. Know the structure of the organization, know what tasks are carried out in each department, become familiar with the ERP, know the different operational processes, etc.
We will focus here on the general training, since the analysis of this is what allows us to build the age-income profiles. Analyzing the effects on the remuneration of specific training would allow us to talk about work rotation and efficiency losses, but it is not the objective of this work.
If a company form – assuming costs – a worker in a competitive market, he cannot appropriate part of the training performance. Companies will only provide general training if the cost of this training does not fall on them, and it is the workers who cost the training if they increase their future salaries.
Starting from the previous equation:
PM’0 + G = W0 + C
And as salaries and marginal products must be equal in all periods (except in the training period in which PM0 = W0 +K has been defined), then we know that:
G = ∑_ (t = 0)^(n-1) ▒ (pmt-wt)/〖(1+i)〗^(t+1) = 0
PM’0 = W0 + C
As we had defined PM’0 as the marginal product plus the opportunity costs and C as the direct training costs plus temporary opportunity costs, we have to:
PM0 = W0 + K
PM0 being the effective marginal product and the direct costs of the formation
That is, in the periods of general training at work, the salary of workers would be lower than that of their marginal product in an amount equal to the cost of their training. This effect on the remuneration of training at work allows us to understand the relationship between remuneration and age.