Dr. Muhammad Zaky, S.E., M.

Si
 Typically, investments involve initial costs or outlays of
expenses with the hope and expectation to recoup/payoffs
overtime.

 Workers undertake three major kinds of labor market

investments:
• Education and training
• Migration
• Search for new jobs

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 Investment in knowledge and skills of workers takes place
in three stages:

• Early childhood human capital where such decisions are

made by others – parents.
• Acquisition of knowledge and skills as full-time student in
high school, college, or vocational training program.
• On-the-job training when in the labor force.

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 Autonomous Investment:
If investment does not depend either on income/output
or the rate of interest. Thus, autonomous investment is
independent of the level of income.

 Induced investment:
Investment that is dependent on the level of income or
on the rate of interest. Thus, induced investment is
dependent of the level of income.

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 Costs of acquiring or adding to human capital fall into three
categories:
• Out-of-pocket or direct expenses – tuition costs,
expenditures on books, and other supplies.
• Forgone earnings – salaries/income given up.
• Psychic losses – occur because learning is often
difficult and tedious for some people.
 Expected returns to education and training investments
(human capital) are in the form of:
• higher future earnings,
• increased job satisfaction over one’s lifetime, and
• a greater appreciation of nonmarket activities and
interests. 6
1. Periode Pulang Pokok (Payback Period)
Payback Period adalah waktu yang dibutuhkan agar investasi yang
direncanakan dapat dikembalikan, atau waktu yang dibutuhkan
untuk mencapai titik impas (BEP/break even point). Keputusan
investasi didasarkan pada semakin cepat payback period semakin baik
investasi

Catatan:
menafsirkan kriteria payback period harus dilakukan secara hati-hati
karena ada beberapa investasi akan menguntungkan dalam jangka
waktu yang cukup panjang.

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2. Benefit/Cost Ratio (B/C Ratio)
BC ratio mengukur mana yang lebih besar, biaya (Cost) yang
dikeluarkan dibandingkan hasil (Benefit) yang diperoleh.

Keputusan investasi didasarkan pada:

Jika nilai B/C = 1, maka B = C (investasi ditolak)
Jika nilai B/C < 1, maka B < C (investasi ditolak)
Jika nilai B/C > 1, maka B > C (investasi diterima)

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 Investment returns or expected future benefits are subject to
delays, risks, and uncertainty, therefore, investment decisions are
made by comparing the present value (PV = B0 = $100) of
investment outlays with the expected future values/returns one
year, two, three, or T-years later (FV = Bi , i = 1, 2, 3,….T ).
The FV (= B1) of $100 at 5% interest rate a year from now is:
B1 = B0 + B0(r) = B0(1 + r) = 100(1.05) = 105 (9.1)

and solving for B0 (= PV) yields:

B1 105
B0    100 (9.2)
(1  r ) 1.05

where r = market interest rate, and

(1 + r) = discount factor.
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 The PV of a human capital investment yields return B1 in the 1st
year, B2 in the 2nd year and so forth, and for T years, it is
expressed as:
B1 B2 B3 BT
Present Value =    ...  (9.6)
1 r 1  r  1  r  1  r 
2 3 T

 People are assumed to maximize their utility, and they will take
a lifetime perspective when making choices about education
and training – they will compare near-term investment costs (C)
with the PV of expected future benefits when making decisions.
 Additional year of schooling is attractive or beneficial if PV > C
B1 B2 B3 BT
   ...   C (9.7)
1 r 1  r  1  r  1  r 
2 3 T

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 People attend college when they believe they will be better
off by so doing.
 College as a consumption good has consumption benefits
that are unlikely to change much overtime.
 A person considering college education has two streams of
earnings (streams A and B) over his/her lifetime:
• Stream A begins after high school (HS) at the age of 18
but does not rise very high.
• Stream B has a negative income for the first four years
owing to college costs and rises above stream A.

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Present-Orientedness
“Present-oriented people are less likely to go to college than
forward-looking people (other things equal)”
 present-oriented people tend to have higher rates of discount (r) and
they impute smaller benefits to college education in comparison to
future-looking people

Age
“Most college students will be young”
 Young people have larger PV of total benefits than older workers
because the younger workers would have longer labor market
experience, therefore, T is greater for younger people than for older
ones
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Costs
“College attendance will decrease if costs of college rise”
Human capital investments are more likely when costs are lower.

Earnings Differentials
“College attendance will increase if the gap widens between the
earnings of college and HS graduates”
The demand for education is positively related to the increases in
expected (but uncertain) lifetime earnings/benefits that a college
education allows

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 Uncertainty
– even if individuals know the average earnings differentials between college
and high school graduates, they must also assess their own probabilities of
success in specific fields requiring a college education/degree. The
presence of role models can help reduce the uncertainty that surrounds
the estimates of future success in specific areas.
– current returns to human capital may be an unreliable estimate of future
returns, that is, returns observed currently may not persist into the future

 Friends
– friends could be important in human capital decisions
 Ethnic affiliation/origin
– The importance attached to human capital investments varies across ethnic
groups.
 Neighborhoods in the human capital decisions of individuals
– Human capital investments decisions in affluent neighborhoods will not be
the same as those in poor-inner-city neighborhoods.
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 If more high school students decide to attend college when
presented in higher returns to such investment, market
forces are put into play that will tend to lower these returns
in the future.
 While a fall in the number of high school graduates will tend
to raise wages in markets for less-educated workers

This reminds us that all investment -even human capital-

involve outlays now and uncertain returns in the future

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