Personnel Economics
2020-2021
Assignment Lecture 2
Student: Student number:
Date: 17-11-2020
Word count: 1647
, Assignment Lecture 2 on Personnel Economics
Assignment about Human Capital Theory
a. Why do you want to invest in higher education, according to Lazear and Gibbs in chapter 3?
According to Lazear and Gibbs, the reason to invest in higher education lies in financialization theory.
Investments in higher education are made when “the present value of the cash flow or other benefits
generated by the investment exceed the present value of the costs of the investment” (Lazear & Gibbs,
2015, p.45). When the earnings of education are higher than the costs, which are comprised of direct
and opportunity costs, the net present value of the investment in education is positive. Investing in
higher education will then be beneficial to the individual. For example, earnings rise due to an
individual’s increased productivity and wage. Moreover, Lazear and Gibbs argue that higher education
does not only increase financial earnings, but offers other benefits like the joy of learning, and
increased effectiveness at home as well. These are the ‘nonpecuniary benefits’ of education.
A second reason for investing in higher education, offered by Lazear and Gibbs, is that our economy is
based on the theory of competitive advantage and trade. Experts in one area can benefit from trading
with experts in another area. Specialization is thus often required to find a job within organizations,
and to specialize yourself, you need to invest in higher education. Moreover, economists have found
that the internal rate of return of education is generally high. The IRR even increased in the past
decades, making high-skilled workers even more valued compared to low-skilled workers. Investing in
higher education can thus increase an individual’s earnings considerably.
b. Why do you want to invest in higher education, according to Weiss?
According to Weiss (1995), investing in higher education is important as it allows for more than only
an increase in productivity benefits. People that are higher educated have been longer at school or
followed more courses and therefore show favorable employee characteristics. For example, higher
educated people are less likely to quit, to be absent, or to be sick. And by engaging in education for a
longer amount of time, people show preserverance . As investing in higher education leads to such
favorable characteristics, high-educated employees often enjoy higher wages. Furthermore, Weiss
argues that there is a positive correlation between ability to learn and length of schooling. This implies
that people who invest in higher education (and thus go to school longer compared to people who only
invest in e.g. primary education) derive greater benefits from education. This is thus also a reason to
invest in higher education.
c. What is the principal difference between Weiss’ explanation and that of Lazear and Gibbs?
The main difference between the explanations is that Weiss focuses on sorting explanations of wages
and Lazear and Gibbs focus on human capital explanations. The sorting approach of Weiss argues that
workers are ‘sorted’ according to unobserved abilities, as workers signal their ability and employers
screen their workers. Thereby, Weiss claims to extend human capital models. On the other hand,
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2020-2021
Assignment Lecture 2
Student: Student number:
Date: 17-11-2020
Word count: 1647
, Assignment Lecture 2 on Personnel Economics
Assignment about Human Capital Theory
a. Why do you want to invest in higher education, according to Lazear and Gibbs in chapter 3?
According to Lazear and Gibbs, the reason to invest in higher education lies in financialization theory.
Investments in higher education are made when “the present value of the cash flow or other benefits
generated by the investment exceed the present value of the costs of the investment” (Lazear & Gibbs,
2015, p.45). When the earnings of education are higher than the costs, which are comprised of direct
and opportunity costs, the net present value of the investment in education is positive. Investing in
higher education will then be beneficial to the individual. For example, earnings rise due to an
individual’s increased productivity and wage. Moreover, Lazear and Gibbs argue that higher education
does not only increase financial earnings, but offers other benefits like the joy of learning, and
increased effectiveness at home as well. These are the ‘nonpecuniary benefits’ of education.
A second reason for investing in higher education, offered by Lazear and Gibbs, is that our economy is
based on the theory of competitive advantage and trade. Experts in one area can benefit from trading
with experts in another area. Specialization is thus often required to find a job within organizations,
and to specialize yourself, you need to invest in higher education. Moreover, economists have found
that the internal rate of return of education is generally high. The IRR even increased in the past
decades, making high-skilled workers even more valued compared to low-skilled workers. Investing in
higher education can thus increase an individual’s earnings considerably.
b. Why do you want to invest in higher education, according to Weiss?
According to Weiss (1995), investing in higher education is important as it allows for more than only
an increase in productivity benefits. People that are higher educated have been longer at school or
followed more courses and therefore show favorable employee characteristics. For example, higher
educated people are less likely to quit, to be absent, or to be sick. And by engaging in education for a
longer amount of time, people show preserverance . As investing in higher education leads to such
favorable characteristics, high-educated employees often enjoy higher wages. Furthermore, Weiss
argues that there is a positive correlation between ability to learn and length of schooling. This implies
that people who invest in higher education (and thus go to school longer compared to people who only
invest in e.g. primary education) derive greater benefits from education. This is thus also a reason to
invest in higher education.
c. What is the principal difference between Weiss’ explanation and that of Lazear and Gibbs?
The main difference between the explanations is that Weiss focuses on sorting explanations of wages
and Lazear and Gibbs focus on human capital explanations. The sorting approach of Weiss argues that
workers are ‘sorted’ according to unobserved abilities, as workers signal their ability and employers
screen their workers. Thereby, Weiss claims to extend human capital models. On the other hand,
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