An economic model suggests that an additional year of education increa

An economic model suggests that an additional year of education increases a student’s future wages by 15 percent. Using this model, answer the following questions:

a) Gary completes 8 years of education, and John completes 9 years of education. If Gary earns $20 per hour, how much is John expected to earn?
b) John completes 9 years of education, and Kevin completes 12 years of education. Given John’s earnings [as calculated in a)], how much is Kevin expected to earn?
c) Is there any limitation to such a model? Explain your answer.

ANSWER

The economic model suggests that an additional year of education increases a student’s future wages by 15 percent. Hence an additional year of education will increase the student’s per-hour income by 1.15 times.
a) If Gary earns $20 per hour with 8 years of education, John is expected to earn 1.15 × $20 or $23 per hour.
b) If John earns $23 per hour with 9 years of education, and Kevin completes 3 additional years of education, Kevin is expected to earn 1.15 × 1.15 × 1.15 × $23 or $34.98 per hour.
c) One of the major limitations of models like these is that they are approximations of real-life phenomena. It is unlikely that an additional year of education will create the same wage increment for all individuals. It is also unlikely that the wage increment from an additional year of high school education will be similar to the wage increment from an additional year of college education. Hence, the relationship between education and earnings as established by this model is not exact and is an approximation of the relationship between education and earnings.