The Economics of Income: If You're So Smart, Why Arent You Rich?

STUDENT'S VERSION

This lesson printed from:
http://www.econedlink.org/lessons/index.php?lid=865&type=student

INTRODUCTION

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If You're So Smart, Why Aren't You Rich?

The purpose of this lesson is to help you explore the relationship between education and income. Income is earned from one's resources. Those resources might be natural resources (oil field, farm land), capital resources (man-made resources that are used in the production of goods and services: computers, factories, sewing machines), entrepreneurship (the ability to organize the other factors to produce goods or services or labor.) Most people earn their income by selling their labor. The lesson will focus on the following question:

"Why do some people earn more income from their labor than others?"




 

TASK

  • Compare occupations by income and amount of education needed.
  • Investigate the costs and benefits of being a professional basketball player.
  • Analyze the importance of furthering education.

PROCESS

  1. What determines income?
    People earn income from their resources.

    What resources? Perhaps?

    *Natural resources such as timber to sell.
    *Capital resources such apartments to rent.
    *Entrepreneurial skills to start a business.
    *Labor to employ.

    The income people earn depends on the quantity and quality of the resources they have to offer, and on the supply and demand for those resources.

    Most people earn income from their labor They get a job and they get paid for the work they do.

    What income do you expect to be earning at age 22?
     
  2. Maybe you are planning to play pro basketball.

    In 2013, 538,676 high school boys participated in high school basketball in the U.S.

    Each year, approximately 60 players join the National Basketball Association.

    The NBA has 30 teams with 12-man rosters, for a total of 360 positions in professional basketball.

    In 2013, there were 13 international players drafted.

    In 2013, 16 college freshmen and sophomores were drafted.

    The average work-life of a professional basketball player is about 6 year. (A pro usually begins around the age of 22 and is over around 28.)

    The average salary (as of 2013) is $5.15 million.

    Minimum salary (2013) is $490,180.

    What are the costs and benefits of choosing to prepare for a high-paying professional basketball career?
     
  3. In addition to supply and demand, there is the matter of productivity. When employers have a choice, they would like to hire the person who is going to create the most value, the person who can produce the most in a given period.

    Employers can't afford to pay a person more than the income they can generate from the work that person does. What does that mean? See if you can figure it out as you help Brandy in Assesment Activity #6.

CONCLUSION

  1. Not even your teacher can predict the future.

    You owe it to yourself to get as much information as you can.

    Expose yourself to information about the economy and careers.

    The odds of being on this list and earning a high income are a lot better than those of becoming a pro ball player…

    Remember, change is the one thing you can count on. No one is wearing leisure suits (http://flashnews.com/news/9sys4sp4.htm  : "Leisure Suit Inventor Unravels Reading Disorder") anymore. Keep your eyes open.

    No one can do this for you.

  2. It's your human capital. Invest in it. Once you've got It, NO ONE can take it away from you! YOU ARE IN CONTROL OF YOUR FUTURE

ASSESSMENT ACTIVITY

  • What are some alternatives to a professional basketball career?
    • What can you expect to earn if you are not a professional basketball player?
       
    • Can you match an occupation with its monthly income? 
       
    • Complete the following worksheet: Handout worksheet
       
    • Were salaries higher or lower than you expected?
      (Remember, too, that these incomes are BEFORE taxes; actual take home pay will be considerably less.)
       
  • Here's the list again, this time in order from highest to lowest income:
    • How many people do you know who could qualify for each of these occupations?

 System Analyst
 Engineer
 Registered nurse
 Dietitian
 Dental Hygienist
 Licensed Practical Nurse
 Dispatcher
 Roofer
 Receptionist
 Cook
 Sewing Machine Operator
 Housekeeper

 

Did you find that you knew fewer people who were trained to do the high-skill jobs and more who could do the low-skill jobs?

If many people are willing and able to do a job at the market price, the supply is high. If few people are willing and able to do a job at that price, the supply is low. Supply and demand are important factors in determining income.

  • When workers learn and practice new skills, they are improving their human capital.
    • Education is a way of learning and practicing new skills. Rank the occupations in order of the number of years it would take to learn to do the job.
       
    • What correlation do you see between education and income?
       
    • Education is a way of investing in one's own human capital.
      • It appears that having more skills makes one more valuable in the marketplace.
      • Generally, more education leads to higher income.
    • What do you think?
      • How much education is enough?
         
      • Is a high school diploma that important?
         
      • Is a college degree worth that much more?
         
  • The following statements are true:
    • When there are many qualified applicants for a position, an employer might offer a lower wage or lower benefits.
    • When there are no qualified applicants or few qualified applicants, an employer would probably offer more income to attract more.

      So, we see that although people with higher education and skills tend to earn more than people with less education and skills, higher education by itself doesn't guarantee high income. What was the problem in this case? It seems that at current salaries, the number of people willing and able to be astronomers is higher than the number astronomers of astronomers demanded.
       
  • Visit this site  to view "Occupations With The Largest Projected Numerical Growth 2008-2018."
    • Demand for people with these skills is expected to increase. Think about the investment in human capital. Think about the supply of people with the skills to do those jobs. Which ones do you think will have rising salaries?

Should Brandy listen to her head or to her heart?

Brandy lives in a college town. She hears that a lot of students want to have papers typed. She decides to start a business typing papers, even though she doesn't know how to type. She's an entrepreneur and she has a computer and a printer. She does a market survey and finds that students are willing to pay no more than $2 per page. She looks for typists. How will she decide which typist to hire?

Brandy interviews 4 applicants, and gives each a timed typing test.

  • Typist A (her boyfriend) can type 2 pages per hour and want to be paid $5 per hour
  • Typist B (her sister) can type 3 pages per hour and wants to be paid $5.50 per hour
  • Typist C (her cousin) can type 4 pages per hour and wants to be paid $5.75 per hour
  • Typist D (her neighbor) can type 5 pages per hour and wants to be paid $6 per hour

Can you help Brandy decide whom to hire?

  1. How much money can she bring in per hour if she hires her boyfriend?
     
  2. How much money can she make per hour if she hires her sister?
    Her cousin?
    Her neighbor?
     
  3. Would it be worth Brandy's boyfriend's time to practice his typing to improve his skills and thus his productivity?
     
  4. If he paid $50 to take a typing class, and gave up 20 hours working at $5 per hour to improve his typing so that he could earn $6 per hour, how many hours would he have to work before he recovered his investment?
     
  5. Would he be taking a risk to make this investment? Explain.
     
  6. If Brandy is going to pay her typists $6 per hour, what is the minimum number of pages they must type per hour?

EXTENSION ACTIVITY

  1. Investigate the relationship between education and income.

    Go to theBureau of Labor Statistics to answer these questions.

    What is the average weekly earnings of:

    • a person without a high school diploma?
    • a person with only a high school diploma?
    • a person with some college, but no degree?
    • a person with an associate's degree?
    • a person with a bachelor’s degree?
    • a person with a professional degree?
    • a person with a doctorate?

    What level of education do you want?

    Why do you think that people are willing to go to school for so many years?

  2. Look at this list of occupations with the highest earnings, regardless of the training required. Go to America's Career InfoNet .

    What did you notice about the education requirements of these high-paying occupations?

    Did more education seem to correlate with more income?

    About Supply & Demand

    The number of people with science degrees who are willing and able to work at current market wages is thesupply. Higher wages will attract more people to the field; lower wages will encourage people to choose other options.

    The number of people with science degrees that employers are willing and able to pay current market wages is the demand. At higher wages employers will demand fewer people with science degrees. At lower wages employers will demand more people with science degrees.

    Does higher education guarantee a job or high income?

    Visit Forbes and Read the article by Richard Vedder

    Think about this

    1. While it is true that there is a strong correlation between higher education and having a larger income, the increase in income comes at high and increasing cost, is it worth it?

    2. Was he encouraging more people to come into the field? Was he hoping to increase the supply of people with science degrees?

    3. Dr. Hale seems to be saying that at the market price, the quantity demanded of people with science degrees is less than the quantity supplied of people who want those jobs. How do you think that would affect wages?

    4. Based on this article, would you think that, when a job is announced in this field, many applicants would apply or few would apply?

  3. Go to America's Career InfoNet site   again and read the occupation report for astronomers.

    What did you learn about the current wages and demand for astronomers?

    What did you learn about the predicted wages and demand for astronomers?

    What would you expect to happen in fields where demand is increasing?

    What occupations are increasing in demand?

    Now look at the at the fastest growing occupations one more time.

    Why do you think that demand is increasing in computer-related fields?

    Based on the information you’ve seen, which seems to be true? Wages are likely to go up most in fields with:

    • increasing demand and low skills?
    • increasing demand and high skills?
    • decreasing demand and low skills?
    • decreasing demand and high skills?

    Why doesn't everyone take a job as a computer engineer, physician or one of the other higher-paying occupations?

    Since the skills one gets from education make such a difference in income, why doesn't everyone get the skills?

  4. To get an education, a person must be willing and able to pay the costs.

    List as many of the costs of getting more education and training that you can think of.

    Did you think of all of these? Did you think of more?

    • Tuition & Books
    • All living costs: Room, Board, Transportation, Clothes

    Did you think of others?

    Did you think of opportunity costs? Opportunity costs are things that one gives up as a result of having chosen something else. Can you think of any opportunity costs you'd have to pay in order to get advanced education?

    Whatever income one might have earned, or the fun one might have had, or the sports one might have participated in, could be some of the opportunity costs of:

    • Time spent studying and keeping grades high to qualify for entrance
    • Time spent preparing for entrance exams
    • Time spent learning about and comparing potential training opportunities
    • Time spent preparing and submitting applications<
    • Time spent volunteering or working in organizations to demonstrate interest in one's chosen field*
    • Time spent getting letters of recommendation*

    What other things did you think of?

    *Even those who can afford some education programs often can't get in because of the limited number of openings. At some physical therapy schools, for instance, there are more than 1,000 applications for 40 openings. Competition is keen.

    These are the costs one pays to make an investment in one's human capital.

    One makes this investment in order to do work one enjoys, avoid work one doesn't enjoy, and improve one's lifetime earnings.

    So far we know that:

    1. Income is determined by the quality of skills one has and the supply and demand for those skills.

    2. Education is a means of developing skills and knowledge. If the demand for certain skills is low and at current salaries there is a surplus of people with those skills, salaries will probably not be rising.