Human Capital
CHAPTER 1
The Basic Theory of Human Capital
1. General Issues
One of the most important ideas in labor economics is to think of the set of marketable skills of workers as a form of capital in which workers make a variety of investments. This perspective is important in understanding both investment incentives, and the structure of wages and earnings.
Loosely speaking, human capital corresponds to any stock of knowledge or characteristics the worker has (either innate or acquired) that contributes to his or her
“productivity”. This definition is broad, and this has both advantages and disadvantages. The advantages are clear: it enables us to think of not only the years of schooling, but also of a variety of other characteristics as part of human capital investments. These include school quality, training, attitudes towards work, etc. Using this type of reasoning, we can make some progress towards understanding some of the differences in earnings across workers that are not accounted by schooling differences alone.
The disadvantages are also related. At some level, we can push this notion of human capital too far, and think of every difference in remuneration that we observe in the labor market as due to human capital. For example, if I am paid less than another Ph.D., that must be because I have lower “skills” in some other dimension that’s not being measured by my years of schooling–this is the famous (or infamous) unobserved heterogeneity issue. The presumption that all pay differences are related to skills (even if these skills are unobserved to the economists in the standard data sets) is not a bad place to start when we want to impose a conceptual structure on
3
Lectures in Labor Economics empirical wage distributions, but there are many notable exceptions, some of which will be discussed later. Here it is useful to mention three:
(1) Compensating differentials: a worker may be paid less in money, because he is receiving part of his
The Basic Theory of Human Capital
1. General Issues
One of the most important ideas in labor economics is to think of the set of marketable skills of workers as a form of capital in which workers make a variety of investments. This perspective is important in understanding both investment incentives, and the structure of wages and earnings.
Loosely speaking, human capital corresponds to any stock of knowledge or characteristics the worker has (either innate or acquired) that contributes to his or her
“productivity”. This definition is broad, and this has both advantages and disadvantages. The advantages are clear: it enables us to think of not only the years of schooling, but also of a variety of other characteristics as part of human capital investments. These include school quality, training, attitudes towards work, etc. Using this type of reasoning, we can make some progress towards understanding some of the differences in earnings across workers that are not accounted by schooling differences alone.
The disadvantages are also related. At some level, we can push this notion of human capital too far, and think of every difference in remuneration that we observe in the labor market as due to human capital. For example, if I am paid less than another Ph.D., that must be because I have lower “skills” in some other dimension that’s not being measured by my years of schooling–this is the famous (or infamous) unobserved heterogeneity issue. The presumption that all pay differences are related to skills (even if these skills are unobserved to the economists in the standard data sets) is not a bad place to start when we want to impose a conceptual structure on
3
Lectures in Labor Economics empirical wage distributions, but there are many notable exceptions, some of which will be discussed later. Here it is useful to mention three:
(1) Compensating differentials: a worker may be paid less in money, because he is receiving part of his