To most people capital
means a bank account, a hundred shares of IBM stock, assembly lines,
or steel plants in the Chicago area. These are all forms of capital
in the sense that they are assets that yield income and other useful
outputs over long periods of time.
But these tangible forms of capital are not the only ones.
Schooling, a computer training course, expenditures of medical care,
and lectures on the virtues of punctuality and honesty also are
capital. That is because they raise earnings, improve health, or add
to a person's good habits over much of his lifetime. Therefore,
economists regard expenditures on education, training, medical care,
and so on as investments in human capital. They are called
human capital because people cannot be separated from their
knowledge, skills, health, or values in the way they can be
separated from their financial and physical assets.
Education and training are the most important investments in
human capital. Many studies have shown that high school and college
education in the United States greatly raise a person's income, even
after netting out direct and indirect costs of schooling, and even
after adjusting for the fact that people with more education tend to
have higher IQs and better-educated and richer parents. Similar
evidence is now available for many years from over a hundred
countries with different cultures and economic systems. The earnings
of more educated people are almost always well above average,
although the gains are generally larger in less developed countries.
Consider the differences in average earnings between college and
high school graduates in the United States during the past fifty
years. Until the early sixties college graduates earned about 45
percent more than high school graduates. In the sixties this premium
from college education shot up to almost 60 percent, but it fell
back in the seventies to under 50 percent. The fall during the
seventies led some economists and the media to worry about
"overeducated Americans." Indeed, in 1976 Harvard economist Richard
Freeman wrote a book titled The Overeducated American. This
sharp fall in the return to investments in human capital put the
concept of human capital itself into some disrepute. Among other
things it caused doubt about whether education and training really
do raise productivity or simply provide signals ("credentials")
about talents and abilities.
But the monetary gains from a college education rose sharply
again during the eighties, to the highest level in the past fifty
years. Economists Kevin M. Murphy and Finis Welch have shown that
the premium on getting a college education in the eighties was over
65 percent. Lawyers, accountants, engineers, and many other
professionals experienced especially rapid advances in earnings. The
earnings advantage of high school graduates over high school
dropouts has also greatly increased. Talk about overeducated
Americans has vanished, and it has been replaced by concern once
more about whether the United States provides adequate quality and
quantity of education and other training.
This concern is justified. Real wage rates of young high school
dropouts have fallen by more than 25 percent since the early
seventies, a truly remarkable decline. Whether because of school
problems, family instability, or other factors, young people without
a college or a full high school education are not being adequately
prepared for work in modern economies.
Thinking about higher education as an investment in human capital
helps us understand why the fraction of high school graduates who go
to college increases and decreases from time to time. When the
benefits of a college degree fell in the seventies, for example, the
fraction of white high school graduates who started college fell,
from 51 percent in 1970 to 46 percent in 1975. Many educators
expected enrollments to continue declining in the eighties, partly
because the number of eighteen-year-olds was declining, but also
because college tuition was rising rapidly. They were wrong about
whites. The fraction of white high school graduates who enter
college rose steadily in the eighties, reaching 60 percent in 1988,
and caused an absolute increase in the number of whites enrolling
despite the smaller number of college-age people.
This makes sense. The benefits of a college education, as noted,
increased in the eighties. And tuition and fees, although they rose
about 39 percent from 1980 to 1986 in real, inflation-adjusted
terms, are not the only cost of going to college. Indeed, for most
college students they are not even the major cost. On average,
three-fourths of the private cost—the cost borne by the student and
by the student's family—of a college education is the income that
college students give up by not working. A good measure of this
"opportunity cost" is the income that a newly minted high school
graduate could earn by working full-time. And during the eighties
this forgone income, unlike tuition, did not rise in real terms.
Therefore, even a 39 percent increase in real tuition costs
translated into an increase of just 10 percent in the total cost to
students of a college education.
The economics of human capital also account for the fall in the
fraction of black high school graduates who went on to college in
the early eighties. As Harvard economist Thomas J. Kane has pointed
out, costs rose more for black college students than for whites.
That is because a higher percentage of blacks are from low-income
families and, therefore, had been heavily subsidized by the federal
government. Cuts in federal grants to them in the early eighties
substantially raised their cost of a college education.
According to the 1982 "Report of the Commission on Graduate
Education" at the University of Chicago, demographic-based college
enrollment forecasts had been wide of the mark during the twenty
years prior to that time. This is not surprising to a "human
capitalist." Such forecasts ignored the changing incentives—on the
cost side and on the benefit side—to enroll in college.
The economics of human capital have brought about a particularly
dramatic change in the incentives for women to invest in college
education in recent decades. Prior to the sixties American women
were more likely than men to graduate from high school but less
likely to continue on to college. Women who did go to college
shunned or were excluded from math, sciences, economics, and law,
and gravitated toward teaching, home economics, foreign languages,
and literature. Because relatively few married women continued to
work for pay, they rationally chose an education that helped in
"household production"—and no doubt also in the marriage market—by
improving their social skills and cultural interests.
All this has changed radically. The enormous increase in the
labor participation of married women is the most important labor
force change during the past twenty-five years. Many women now take
little time off from their jobs even to have children. As a result
the value to women of market skills has increased enormously, and
they are bypassing traditional "women's" fields to enter accounting,
law, medicine, engineering, and other subjects that pay well.
Indeed, women now comprise one-third or so of enrollments in law,
business, and medical schools, and many home economics departments
have either shut down or are emphasizing the "new home economics."
Improvements in the economic position of black women have been
especially rapid, and they now earn just about as much as white
women.
Of course, formal education is not the only way to invest in
human capital. Workers also learn and are trained outside of
schools, especially on jobs. Even college graduates are not fully
prepared for the labor market when they leave school, and are fitted
into their jobs through formal and informal training programs. The
amount of on-the-job training ranges from an hour or so at simple
jobs like dishwashing to several years at complicated tasks like
engineering in an auto plant. The limited data available indicates
that on-the-job training is an important source of the very large
increase in earnings that workers get as they gain greater
experience at work. Recent bold estimates by Columbia University
economist Jacob Mincer suggest that the total investment in
on-the-job training may be well over $100 billion a year, or almost
2 percent of GNP.
No discussion of human capital can omit the influence of families
on the knowledge, skills, values, and habits of their children.
Parents affect educational attainment, marital stability,
propensities to smoke and to get to work on time, as well as many
other dimensions of their children's lives.
The enormous influence of the family would seem to imply a very
close relation between the earnings, education, and occupations of
parents and children. Therefore, it is rather surprising that the
positive relation between the earnings of parents and children is
not strong, although the relation between the years of schooling of
parents and children is stronger. For example, if fathers earn 20
percent above the mean of their generation, sons at similar ages
tend to earn about 8 percent above the mean of theirs. Similar
relations hold in Western European countries, Japan, Taiwan, and
many other places.
The old adage of "from shirtsleeves to shirtsleeves in three
generations" is no myth; the earnings of grandsons and grandparents
are hardly related. Apparently, the opportunities provided by a
modern economy, along with extensive public support of education,
enable the majority of those who come from lower-income backgrounds
to do reasonably well in the labor market. The same opportunities
that foster upward mobility for the poor create an equal amount of
downward mobility for those higher up on the income ladder.
The continuing growth in per capita incomes of many countries
during the nineteenth and twentieth centuries is partly due to the
expansion of scientific and technical knowledge that raises the
productivity of labor and other inputs in production. And the
increasing reliance of industry on sophisticated knowledge greatly
enhances the value of education, technical schooling, on-the-job
training, and other human capital.
New technological advances clearly are of little value to
countries that have very few skilled workers who know how to use
them. Economic growth closely depends on the synergies between new
knowledge and human capital, which is why large increases in
education and training have accompanied major advances in
technological knowledge in all countries that have achieved
significant economic growth.
The outstanding economic records of Japan, Taiwan, and other
Asian economies in recent decades dramatically illustrate the
importance of human capital to growth. Lacking natural
resources—they import almost all their energy, for example—and
facing discrimination against their exports by the West, these
so-called Asian tigers grew rapidly by relying on a well-trained,
educated, hardworking, and conscientious labor force that makes
excellent use of modern technologies.
About the Author
Gary S. Becker is University Professor of
Economics and Sociology at the University of Chicago and the
Rose-Marie and Jack R. Anderson Senior Fellow at Stanford's Hoover
Institution. He was a pioneer in the study of human capital. He won
the 1992 Nobel Prize in economics. (See also: Biography: Gary S.
Becker.)
Further Reading
Becker, Gary S. Human Capital. 1975.
Freeman, Richard. The Overeducated American. 1976.
Kane, Thomas J. "College Entry by Blacks since 1970: The Role of
Tuition, Financial Aid, Local Economic Conditions, and Family
Background." Unpublished manuscript, 1990.
Murphy, Kevin M., and Finis Welch. "Wage Premiums for College
Graduates: Recent Growth and Possible Explanations." Educational
Researcher 18 (1989): 17-27.
"Report of the Commission on Graduate Education." University
of Chicago Record 16, no. 2 (May 3, 1982): 67-180.
