Labor Market Problem: Human Capital Investment

Assume that there is a market for skilled workers who have undergraduate college degrees. If 1) the wage of unskilled labor is $35,000 per year; 2) the normal return on investments is 10%; and 3) the investment in an undergraduate education is $150,000.

i) Find the wage premium and long-term wage for college educated workers. Explain your answer.

ii) Find the actual wage premium and return if college educated workers earn $40,000 per year. Explain your answer.

iii) Explain how the market for college educated workers earning $40,000 per year will adjust over the long term.

Assume a college educated worker earns a competitive return on their investment in college each year they work.

iv) How much will they earn back from their investment in college working for 20 years? Explain. 30 years? Explain. 40 years? Explain.

Suppose that a masters degree requires an additional investment of $50,000 above an undergraduate degree.

(v) Find the wage premium for a worker with a masters degree and the long-term wage for a worker with a masters degree.