chapter 6 Flashcards
In describing the role of “fixed capital” in an economy, Adam
Smith (1776, Book II, Ch. 1) considered four categories.
The fourth type was what economists now refer to as WHAT
“human capital,”
Smith described as consisting . . . of the acquired and useful abilities
of all the inhabitants or members of the society
HUMAN CAPITAL
The acquisition of such
talents, by the maintenance of the acquirer during his education, study, or
apprenticeship, always costs a real expense, which is a capital fixed and
realized, as it were, in his person.
HUMAN CAPITAL
WHAT is the knowledge, skills, education,
and experience possessed by an individual or
population, which can be used to create economic
value.
Human capital
Economist describe higher education as a price signal or a
WHAT
screening device.
WHAT MAKES UP HUMAN CAPITAL?
Education and training
Experience and Expertise
Health and Physical Wellness
Soft and Hard Skills
SHEE
Formal education and training programs, can improve a person’s
knowledge and skills, making them more valuable in the labor market.
Education includes formal education, such as a college degree, as well
as informal learning. Training includes on-the-job training vocational
training, professional program, among others
EDUCATION AND EXPERIENCE
People who have extensive experience in a particular
field or who have developed a high level of expertise in
a particular area may have valuable human capital.
EXPERIENCE AND EXPERTISE
Good health and physical fitness can enable
people to work longer and more effectively,
which can increase their human capital.
health and physical fitness
skills are specific, technical abilities that are typically learned
through education or training.
HARD
personal
attributes and social skills that enable people to interact effectively with
others often necessary to perform tasks or functions
SOFT SKILLS
help people to work effectively with others and adapt to changing
situations
SOFT SKILLS
an economic theory that focuses on the
value of human knowledge, skills, and abilities as they relate to
economic growth and development.
HUMAN CAPITAL THEORY
According to this theory,
investing in human capital, such as through education and
training programs, can lead to increased productivity,
innovation, and competitiveness
HUMAN CAPITAL THEORY
This describes the relationship between an
individual’s earnings and their level of education and work experience. It
suggests that education and work experience lead to increased
productivity and earning potential, and that the returns to education and
work experience decline over time
Mincer earnings function.
It suggests that the returns to education and
work experience are not uniform across all individuals, but rather depend
on the individual’s characteristics and circumstances
Becker-Chiswick model
This theory suggests that education
serves as a signal to employers of an individual’s productivity and ability,
and that the returns to education are higher for individuals who are more
productive
Signaling theory of education.
human capital theories
mincer earnings function
becker-chiswick model
signaling theory of education
tool developed by the World Bank to assess how effectively
countries are utilizing the skills and abilities of their citizens to
contribute to economic development.
human capital index
takes into account factors such as education, health, and
employment, and calculates the potential loss of economic
productivity due to these issues.
human capital index
WHAT was first published in October 2018 and covers HOW MANY
countries, with a score ranging from ___, where _ represents
the maximum potential for human capital development.
The HCI was first published in October 2018 and covers 157
countries, with a score ranging from 0 to 1, where 1 represents
the maximum potential for human capital development.
PILLARS OF HUMAN CAPITAL INDEX
SURVIVAL
EDUCATION
HEALTH
SHE
Measures the probability of a child born today
surviving to age five
SURVUVAL
Measures the amount of schooling that a child born
today can expect to receive, including the quality of the
education system
EDUCATION
Measures the health outcomes of a child born today,
including immunization rates, child malnutrition, and child
mortality
HEALTH
USES OF CAPITAL
BECKER VIEW
GARDENER VIEW
SCHULTZ/NELSON-PHELPS VIEW
BOWLES-GINTIS VIEW
SPENCE VIEW
Human capital is directly useful in the production process.
More explicitly, human capital increases a worker’s productivity in all tasks,
though possibly differentially in different tasks, organizations, and situations.
BECKER VIEW
According to this view, we should not think of human
capital as unidimensional, since there are many dimensions or types of
skills. A simple version of this approach would emphasize mental vs.
physical abilities as different skills
GARDENER VIEW
Human capital is viewed mostly as the
capacity to adapt. According to this approach, human capital is especially
useful in dealing with “disequilibrium” situations, or more generally, with
situations in which there is a changing environment, and workers have to
SCHULTZ/NELSON-PHELPS VIEW
Human capital is the capacity to work in
organizations, obey orders, in short, adapt to life in a
hierarchical/capitalist society
BOWLES GINTIS VIEW
Observable measures of human capital are
more a signal of ability than characteristics independently
useful in the production process
SPENCE VIEW
SOURCES OF HUMAN CAPITAL DIFFERENCES
- Innate ability. Workers
- Education/Schooling.
- School quality and non-schooling investments.
- Training.
- Experience.
- Pre-labor market influences.
- Health.
- Culture.
- Economic and social policies.
10.Demographic factors
Workers can have different amounts of skills/human capital
because of innate differences.
innate ability
Differences in education and training can lead to
differences in knowledge and skills, which can affect an individual’s ability
to contribute to the economy.
education
A pair of identical twins
who grew up in the same environment until the age of 6, and then
completed the same years of schooling may nevertheless have different
amounts of human capital.
School quality and non-schooling investments
. This is the component of human capital that workers acquire
after schooling, often associated with some set of skills useful for a
particular industry, or useful with a particular set of technologies.
Training
. Work experience and on-the-job training can provide
individuals with valuable skills and knowledge that can increase their value
in the labor market
Experience
There is increasing recognition among
economists that peer group effects to which individuals are exposed before
they join the labor market may also affect their human capital significantly.
Pre-labor market influences.
. Poor health can limit an individual’s ability to work and contribute to
the economy, while good health can improve productivity
Health
. Differences in cultural norms and values can affect an individual’s
ability to acquire knowledge and skills, as well as their willingness to invest
in education and training.
Culture
Government policies and practices, such
as education funding and access to training programs, can affect an
individual’s ability to acquire human capital
Economic and social policies.
Factors such as age, gender, and race can also
affect an individual’s ability to acquire human capital, due to historical and
ongoing inequalities and discrimination
Demographic factors.
STYLIZED FACT OR BLUFF
Human capital is a key driver of economic growth. Countries with high
levels of human capital tend to have higher levels of productivity and economic
growth
FACT
STYLIZED FACT OR BLUFF
Human capital is correlated with income. Individuals with higher levels of
human capital tend to have higher income levels. Education is strongly
correlated with labor force participation rates, unemployment rates, and
earnings
FACT
FACT OR BLUFF
Investment in human capital has low returns. Investing in education and
training can lead to decreased productivity and lower income levels, resulting in
lower returns on investment
bluff
fact or bluff
Human capital is cumulative. Knowledge and skills acquired through
education and training can build on each other, leading to greater levels of
human capital over time
fact or bluff
Human capital is not transferable. Knowledge and skills are not acquired through
education and training can be used in different industries and occupations,
leading to decresed mobility in the labor market
bluff
fact or bluff
Human capital is mobile. Individuals with high levels of human capital can
often move to different countries or regions in search of better job opportunities
and higher income levels.
fact
fact or bluff
Human capital is equal. There are often significant differences in human
capital levels among individuals and populations, due to factors such as
education, health, and cultural differences
bluff
Human capital is unequal.
fact or bluff
Human capital is subject to depreciation. Over time, knowledge and skills
may become obsolete or decline in value, requiring further investment in
education and training to maintain their value
fact
This is a theoretical model that is used to study the relationship between
education and labor market outcomes, such as wages and employment. The
model is based on the idea that education can be thought of as an investment
in human capital, with the goal of increasing productivity and earning potential
in the labor market
schooling model
In the WHAT model, individuals make a decision about how much
education to pursue based on the expected return on their investment. This
return is calculated based on the expected increase in earnings that the
individual will receive as a result of their education, compared to the cost of
obtaining that education (e.g., tuition, lost wages while attending school
schooling
often used
to analyze the relationship between
education and wages and to understand
the factors that influence an individual’s
decision to pursue education.
WAGE SCHOOLING LOCUS
WHAT is a graphical representation of an individual’s
earnings over time as he progresses through his career. The profile shows the
individual’s earnings at different ages, typically starting at age 20 and ending
at age 60 or beyond.
age-earnings profile
This can take many different forms, but they typically show the average or
median earnings of individuals in a particular age group, such as 25-34, 35
44, 45-54, etc. The profile may also show the range of earnings within each
age group, such as the lowest and highest earnings, or the 25th and 75th
percentiles
Age-earnings Profile
PROPERTIES OF Age-earnings Profile
▪ Positive slope. Age-earnings profiles are typically upward sloping, meaning that earnings
tend to increase with age. This reflects the fact that individuals generally accumulate more
experience and skills as they age, which can lead to higher wages.
▪ Concavity. Age-earnings profiles are often concave, meaning that the rate of increase in
earnings slows as an individual gets older. Earnings rise over time at a decreasing rate.
This may be due to factors such as the slowing of skill accumulation or the diminishing
returns to experience.
▪ Asymptotes. Age-earnings profiles may approach an asymptote, or a level beyond which
earnings do not continue to increase. This may be due to factors such as retirement or the
end of an individual’s career.
▪ Hump shape. Some age-earnings profiles may have a “hump” shape, with a rapid
increase in earnings early in an individual’s career followed by a slower rate of increase
later on. This may be due to the fact that individuals invest more in education and training
early in their career, leading to higher earnings
The WHAT is an economic model developed by
WHO that describes the relationship between an
individual’s earnings and their level of education. The model suggests
that, on average, an individual’s earnings increase with their level of
education, with the rate of increase decreasing as the level of
education increases
Mincer earnings function
economist Jacob Mincer
The Mincer earnings function takes the form of a linear equation, and is typically expressed as
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
= 𝑎 + 𝑏 ∗ 𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑒𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛 + 𝑐 ∗ 𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑒𝑥𝑝𝑒𝑟𝑖𝑒𝑛𝑐𝑒 + 𝑑 ∗ (𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑒𝑥𝑝𝑒𝑟𝑖𝑒𝑛𝑐𝑒)^2
+ 𝑒𝑟𝑟𝑜𝑟 𝑡𝑒𝑟m
can be explained as a function of schooling and labor market
experience using the Mincer equation;
Earnings
