Wednesday, August 10, 2011

Human Capital

It was Gary Becker who firstly formalized the concept of Human Capital in his book, "Human Capital - A Theoretical and Empirical Analysis with Special Reference to Education". He argued that human resources are a kind of capital, and on-the-job training, education, and the other similar activities are investments in human capital. Nowadays, many people understand the concept, but when the book is firstly published, the argument was epoch-making.

In the book, he analyzed human capital mainly by using demand-supply framework, a classical but still useful framework. Price of human capital, or one's income, is determined at the point where demand and supply curves intersect.

A supply curve of human capital is mainly determined by one's economic condition - for example, if one was raised in poor family, university education could be too costly to have. In this framework, equality of opportunities means is achieved by making supply curve identical. Practical policy would be to establish public schools, let the tuition be free, and so on.

In the framework, a demand curve is mainly determined by one's talent. Some people believe that one's income ought to be high or low based on his or her talent, the notion that Dr. Becker called "the elite approach". It may be difficult to separate demand and supply sides, because it seems that one's gift may be affected by her/his family condition (malnutrition, carelessness toward infants due to busyness, etc would severely affect one's future ability).

Professor Becker also estimated the impact of college education, by calculating annual return of it. According to him, average annual return on college education is ranged from 11% to 13%. The rangee varies based on one's social status: in United States, return on human capital investment was higher for whites and men but lower for non-whites and women, partly because, especially in those days, whites and men could promote more and enjoy more income, whereas non-whites and women could not.

This variation in return on higher education suggests that those who are excluded from opportunities would have less incentive to have higher education, because the return on investment is relatively low for those people. The variation may also explain why test scores or university entrance rates of some groups are lower than the others. For some people, getting higher score in schools may be less meaningful, because the benefit is smaller than the cost when one's inherited wealth is small: one in poor family may find it more attractive to spend his or her time for doing part-time job rather than studying.

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