Human capital is the stock of acquired talents, skills and knowledge which may enhance a worker’s earning power in the labour market. A distinction is commonly made between general human capital—which is considered as affecting potential earnings in a broad range of jobs and occupations—and specific human capital, which augments people’s earning power within the particular firm in which they are employed but is of negligible value elsewhere. An example of the former would be formal education in general skills such as mathematics; an example of the latter would be the acquired knowledge about the workings of, and personal contacts within, a particular firm. In many cases human capital is of an intermediate form, whether it be acquired ‘off the job’, in the form of schooling or vocational training, or ‘on the job’ in terms of work experience.
In several respects the economic analysis of human capital raises problems similar to that of capital as conventionally understood in terms of firms’ plant and equipment. It is likely to be heterogeneous in form; it is accumulated over a substantial period of time using labour and capital already in existence; further investment usually requires immediate sacrifices (in terms of forgone earnings and tuition fees); its quality will be affected by technical progress; the prospective returns to an individual are likely to be fairly uncertain, and the capital stock will be subject to physical deterioration and obsolescence. Nevertheless there are considerable differences. Whereas one can realize the returns on physical or financial capital either by receiving the flow of profits accruing to the owner of the asset or by sale of the asset itself, the returns on human capital can usually be received only by the person in whom the investments have been made (although there are exceptions, such as indentured workers), and usually require further effort in the form of labour in order to be realized in cash terms. The stock of human capital cannot be transferred as can the titles to other forms of wealth, although the investments that parents make in their children’s schooling and in informal education at home are sometimes taken as analogous to bequests of financial capital.
While the idea of investment in oneself commands wide acceptance in terms of its general principles, many economists are unwilling to accept stronger versions of the theory of earnings determination and the theory of income distribution that have been based on the pioneering work of Becker (1964) and Mincer (1958). This analysis generally assumes that everywhere labour markets are sufficiently competitive, the services of different types of human capital sufficiently substitutable and educational opportunities sufficiently open, such that earnings differentials can be unambiguously related to differential acquisition of human capital.
On the basis of such assumptions estimates have been made of the returns (in terms of increased potential earnings) to human investment (measured in terms of forgone earnings and other costs) by using the observed earnings of workers in cross-sectional samples and in panel studies over time. The rates of return to such investment has usually been found to be in the range of 10–15 per cent. However, it should be emphasized that such estimates often neglect the impact of other economic and social factors which may affect the dispersion of earnings.
Frank A.Cowell
London School of Economics and Political Science
References
Becker, G.S. (1964) Human Capital, New York.
Mincer, J. (1958) ‘Investment in human capital and personal income distribution’, Journal of Political Economy 66.
Further reading
Mincer, J. (1974) Schooling, Experience and Earnings, New York.
Schultz, T.W. (1972) Investment in Education, Chicago.
