An Application of the Analytical Theory of Investment to the Education-Compensation Problem

Essay by nabhatiesCollege, UndergraduateA, September 2008

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1. IntroductionToday's society is built around a monetary system, one in which money is used as the primary medium of exchange. For an object to function as money it must be universally accepted and others must be willing to take it in payment for goods and services. Income can be expressed as the gathering of money, the net inflow or outflow of cash over a given period of time. One must have some source of income in order to survive in today's society. There is a long-standing belief that greater income can be earned through progressively higher levels of education. A plethora of literature already exists supporting the proposed positive relationship between education and subsequent employment compensation. Coulombe and Tremblay (2007) argue that university attainment has a positive and significant effect on relative provincial income even after controlling for skills. Previous works by Lange and Topel (2004), Krueger and Lindahl (2001), and Barro (2001) all support the notion that education, at its present state, is still a worthwhile investment for many individuals.

Psacharopoulos (1994) has even stated that the pursuit of post-secondary education is beneficial on a global scale.

Other proponents, however, argue that higher education has only a partial effect on income levels and economic output per capita (Hall and Jones, 1999). This puts a damper on the time-tested belief that every individual should enroll in a college or university. Therefore, the freshly graduated high school student has a choice: does he take a chance on the real world with only his secondary school education or does he follow the path to higher learning? There are many factors to consider when choosing which route to take. These include wage rates, unemployment rates, relative job security and financial safety. Long run and short run factors should also be considered. In...