In many countries, the government uses tax money to fund colleges, so that colle

Question

In many countries, the government uses tax money to fund colleges, so that college education becomes cheaper. Assume that college education generates human capital. People who graduate from college earn not only the marginal product of labor, but in addition the marginal product of human capital. Discuss the following statement, using the framework of a production function with capital, labor and human capital as inputs: ”This policy makes society more unequal. It helps some people to go to college who otherwise couldn’t, but it harms the people who cannot go to college anyway

Explanation / Answer

Answer: Consider two situations, one when college education is expensive and the production fucntion has only labor and capital as an inputs.

Y= F(L,K)

In this situation, most of the labor is unksilled because we have considered that the college education is expensive and very less labor has access to education which makes the labor as unskilled labor. Since, it is unskilled, then it will take more time to produce the output, it means its marginal product of labor is less. Also, there is some fraction of skilled labor is available in the society which has access to higher education. Since, the composition of unskilled labor is more and skilled labor is less, the firm can easily hire unskilled labor at lesser wages and skilled labor can be hired at higher wages obviously because they have skills and higher education.Coming to the cost of production, the cost of production in respect to the marginal products of the unskilled labor, it will be high because unskilled labor is not efficient and has not much access to technology, does not know how to operate technology. The firm has to incur a lot of money on their traning sessions, etc. So, the cost of production will be more, also they will produce less in a given time due to their low marginal productivity.

Now coming to the second scenario in which the production function has inputs like labor, capital and human capital, because of low education fees as government is funding some part of education fees.

Y= F(L,K,H)

Now, most of the students will try to complete their higher education and then join their jobs. Hence, the composition of skilled worker will be more in the society as compared to the unskilled workers. Now, there are some major points that we need to discuss:

The conclusion is that the marginal product in production rises, the cost of production falls and firms can compete in the market. The unemployment of unskilled workers will rise. The government can also spend the money to open skill center so that those who are unemployed and unskilled, can learn new skills and enter the skilled labor force and find their respective jobs. Otherwise, the unskilled labor remains unemployed or have to do the low level jobs.

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