Education, Skills, and Earnings
Jayden is a junior, and everyone keeps asking him the same question: "College, a trade program, or a job right away?" Each path costs money and time, and each pays off differently. By the end of this page you will be able to put numbers on that choice, and also explain what the numbers leave out.
Human capital: why skills pay
Human capital is the knowledge, skills, and training a person has that make them productive at work. Think of it like a toolbox. The more useful tools you carry, the more valuable you are to an employer.
Examples: coding in Python, welding, speaking two languages, nursing skills, managing a team.
Why does more human capital usually mean higher pay? A certified welder can do work that a brand-new worker cannot. The welder produces more value per hour, and the employer would lose that value if the welder left. A worker who is more productive and harder to replace gets paid more. Pay also varies within the same job because of experience, certifications, and results.
Economists say that education and training build human capital*. Define human capital in your own words and give two examples of skills. Then explain in two or three…
Economists say that education and training build human capital. Define human capital in your own words and give two examples of skills. Then explain in two or three sentences why a certified welder usually earns more than a new worker with no training.
Reading earnings and unemployment data
Economists compare groups of workers by education level. The table below uses illustrative data, not official statistics.
| Education level | Median weekly earnings | Unemployment rate |
|---|---|---|
| Less than high school | $\$700$ | 6.0% |
| High school diploma | $\$900$ | 4.5% |
| Bachelor's degree | $\$1{,}500$ | 2.5% |
The pattern: as education goes up, earnings tend to go up and unemployment tends to go down.
To turn weekly pay into yearly pay, multiply by 52. For a high school diploma: $\$900 \times 52 = \$46{,}800$ per year.
The table shows illustrative (not official) data. | Education level | Median weekly earnings | Unemployment rate | |---|---|---| | Less than high school | $\$700…
The table shows illustrative (not official) data.
| Education level | Median weekly earnings | Unemployment rate |
|---|---|---|
| Less than high school | $\$700$ |
6.0% |
| High school diploma | $\$900$ |
4.5% |
| Bachelor's degree | $\$1{,}500$ |
2.5% |
(a) Which level has the highest earnings and the lowest unemployment?
(b) Calculate yearly earnings (52 weeks) for a worker with a high school diploma.
Use these illustrative data: workers with a high school diploma earn about $\$900$ per week, and workers with a bachelor's degree earn about $\$1{,}500$ per week. The…
Use these illustrative data: workers with a high school diploma earn about $\$900$ per week, and workers with a bachelor's degree earn about $\$1{,}500$ per week. The unemployment rates are 4.5% and 2.5%, respectively.
(a) Calculate the yearly (52-week) earnings difference between the two groups.
(b) Calculate the difference over a 40-year career.
(c) In a group of 1,000 workers from each level, how many would be unemployed?
(d) Explain why the (b) figure may overstate or understate what a particular student would gain.
Costs and benefits of more education
Education is an investment. You pay now and hope to earn more later. There are two kinds of cost.
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Direct costs: money you pay, such as tuition, fees, books, and supplies.
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Opportunity cost: the value of the best alternative you give up. If you study full time instead of working, the pay you do not earn is part of the cost.
A short program costs less. Sofia's medical-assistant certificate has $\$6{,}000$ tuition plus $\$500$ for books, so the direct cost is $\$6{,}500$. A raise of $\$3$ per hour for 2,000 hours is $\$6{,}000$ more per year, so she could recover the direct cost in about a year.
Numbers are not the whole story. Benefits that a calculation leaves out include job satisfaction, better benefits, more job security, and more career options. Costs left out include debt stress and the risk of not finishing. Life circumstances, such as family duties, health, or where you live, also change which choices are realistic.
Sofia is considering a medical-assistant certificate program. Tuition is $\$6{,}000$ and books and supplies cost $\$500$. After she finishes, she expects to earn $\$3…
Sofia is considering a medical-assistant certificate program. Tuition is $\$6{,}000$ and books and supplies cost $\$500$. After she finishes, she expects to earn $\$3$ more per hour than now, working 2,000 hours a year.
(a) What is the total direct cost of the program?
(b) How much more will she earn in a year?
Ethan is deciding whether to attend a 2-year community college program full time. Tuition is $\$4{,}000$ per year. Books are $\$600$ per year. If he did not attend, he…
Ethan is deciding whether to attend a 2-year community college program full time.
-
Tuition is
$\$4{,}000$per year. -
Books are
$\$600$per year. -
If he did not attend, he would work full time and earn
$\$28{,}000$per year. -
After graduating, he expects to earn
$\$12{,}000$more per year than he would without the degree.
(a) Calculate the total cost of the program, including the earnings he gives up (the opportunity cost).
(b) How many years of working after graduation will it take for the extra earnings to cover that cost?
(c) Name one benefit of the degree that this calculation leaves out.
Jayden is comparing two paths after high school. Path 1: a 4-year degree at a public university. Tuition, fees, and books come to $\$13{,}000…
Jayden is comparing two paths after high school.
-
Path 1: a 4-year degree at a public university. Tuition, fees, and books come to
$\$13{,}000$per year. Assume living costs are the same with or without college. After graduating he expects to earn$\$48{,}000$per year. -
Path 2: work right away at
$\$32{,}000$per year.
(a) Calculate the total direct cost of the 4 years and the earnings he gives up.
(b) Calculate the extra yearly earnings after graduation and the number of years needed to recover the total cost from (a).
(c) Argue whether the decision should rest only on this calculation, and bring in unemployment risk, career advancement, and student debt.
Pay gaps: raw and unexplained
Pay also differs by gender and by race and ethnicity. Economists debate why these gaps persist. Possible explanations include differences in occupation and industry, years of experience, career interruptions for caregiving, hours worked, access to training and networks, and discrimination. Researchers usually look at two numbers.
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The raw gap compares average or median pay of two whole groups.
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The adjusted (or unexplained) gap is what remains after accounting for factors such as job title, experience, and hours worked.
Explained does not always mean fair. Differences in experience or hours can themselves reflect career interruptions or caregiving. The unexplained part may reflect discrimination, negotiation differences, or factors the study did not measure. Reasons for pay gaps are still debated, so look at the evidence and the assumptions behind it. Similar analyses are used to study gaps by race and ethnicity too.
In a hypothetical occupation, men earn a median of $\$60{,}000…
In a hypothetical occupation, men earn a median of $\$60{,}000$ a year, and women earn 82 cents for every dollar men earn.
(a) Calculate the women's median pay and the dollar gap.
(b) Name three factors that can contribute to a pay gap, such as hours worked, occupation choice, experience, or discrimination.
(c) Explain what is meant by an "unexplained" gap.
A company has 100 men and 100 women. Men average $\$70{,}000$ a year, and women average $\$63{,}000$. After a study accounts for job title, years of experience, and…
A company has 100 men and 100 women. Men average $\$70{,}000$ a year, and women average $\$63{,}000$. After a study accounts for job title, years of experience, and hours worked, women earn 97% of what comparable men earn.
(a) Calculate the raw pay ratio (women's average divided by men's average).
(b) Calculate how much of the gap the study explains and how much is left unexplained.
(c) Explain how skills and productivity can lead to pay differences between workers.
(d) Argue what the company or society might do about the unexplained part. Mention that similar analyses are also used to study racial pay gaps.
Back to the start: Jayden should compare total costs (direct costs plus lost earnings) with the extra yearly pay, find the payback time, and then weigh what numbers cannot capture.