HUMAN CAPITAL THEORY

An Overview
 Materi Kuliah
• Konsep Pembangunan SDM
1 • Konsep Pembangunan Manusia

• Hubungan antara Pembanguan Manusia,

2 Pembangunan Ekonomi dan Demokratisasi

• Teori Human Capital Investment

3
• It is in fact impossible to account for the
structure and functioning of the social
world unless one reintroduces capital in all
its forms and not solely in the one form
recognized by economic theory.
• 3 forms: economic; social and cultural.
 Forms of Capital
• Economic: Money, Property, Shares etc, which
are immediately and directly convertible into
money
• Social: Social obligations and ‘connections’,
think ‘old boys networks’), which is convertible,
in certain conditions, into economic capital
• Cultural: Education, Culture, Habits - which is
convertible, on certain conditions, into economic
capital
 Economic Capital
• Similar to how it is used in mainstream
analysis.
• Money and things easily converted to
money – Property, shares etc.
• In a crucial way, this is the dominant
form and a crucial question is how
other forms are converted into it.
 Social Capital
• “a durable network of more or less
institutionalized relationships of mutual
acquaintance and recognition”.
• Crucial are size, depth and utility of social
networks
 Cultural Capital
- cultural capital encompasses three
dimensions:
(i) personal educational credentials and
experiences (educational capital) that
facilitate the accumulation of cultural tastes
(ii) social background, whereby cultural tastes
are passed down through socialization from
parents’ own educational experiences
(iii) the cultural tastes and dispositions
themselves
 Human Capital Investment
• Endogenous growth economists believe that
improvements in productivity can be
linked to a faster pace of innovation and
extra investment in human capital.
• Endogenous growth theorists stress the need
for government and private sector institutions
and markets which nurture innovation, and
provide incentives for individuals to be
inventive
• There is also a central role for knowledge as
a determinant of economic growth.
 The main points of the endogenous
growth theory are as follows
1. The rate of technological progress should not
be taken as a given in a growth model –
appropriate government policies can
permanently raise a country’s growth rate
particularly if they lead to a higher level of
competition in markets and a higher rate of
innovation
2. There are potential increasing returns from
higher levels of capital investment
3. Theory emphasizes that private investment in
R&D is the central source of technical
progress
4. Protection of property rights and patents can
provide the incentive to engage in R&D
5. Investment in human capital (education and
training of the workforce) is an essential
ingredient of growth
• In 1961 Theodore W. Schultz published an
article in the American Economic Review
entitled "Investment in Human Capital."
• Schultz introduces his theory of Human
Capital. He argues that both knowledge and
skill are a form of capital, and that this capital is
a product of "deliberate investment."
• Schultz highlights Western countries, and
explains their increase in national output as a
result of investment in human capital. He also
makes a direct link between an increase in
investment in human capital, and the overall
increase in workers earnings.
• the concept of human capital implies an
investment in people
• He argues that education, training, and
investments in health open up opportunities
and choices that otherwise would be
unavailable to many individuals.
• Schultz argues that the difference in earnings
between people relates to the differences in
access to education and health
• Schultz also argues that in many underdeveloped
countries, food and shelter are of primary concern,
and thus there are short-term investments made to
deal with these crises.
• In societies whose main concern is not basic needs,
there is the opportunity for long-term investment in
education, health, and migration (i.e., helping people
adjust by finding them jobs and offering them the
opportunity to learn/improve their skills). In the long-
term these investments will strengthen the economy
and raise the standard of living.
• Schultz argues that investment in human capital must
focus on supporting individuals in acquiring an
education, since it is skill and knowledge that affect
one's ability to do productive work
• an investment to enhance these capabilities leads to
an increase in human productivity, which in turn leads
to a positive rate of return. Schultz criticizes those
who see investment in human capital as a cost. He
argues that while in the short-term there may be a
cost (i.e., cost of facility, loss of earnings for workers
while in school, etc), in the long-term the yield from
the investment will far outweigh the cost.
 social implications and policy of
the theory
• Existing tax laws (i.e., in 1961) discriminate
against the investment in human capital.
• Unemployment (i.e., sitting idly) causes
human capital to deteriorate.
• There are hindrances to free choices of
professions.
• There is a need to provide funds for
investment in human capital, and thus, long-
term public and private loans should be made
available to students.
• There should be investments made in migration (i.e., in
helping people settle and find education).
• There has been a failure to adequately invest in those who sit
on the periphery of society (i.e., African-Americans, Puerto-
Ricans, Mexican Nationals, etc.).
• There has been an under-investment in human beings in
general (beyond just those on the margins).
• The return on public investment in human capital should not
be returned directly to each individual. The individual will see
a return in the form of wages, and will benefit from a strong
economy.
• As a society, we must assist underdeveloped countries to
achieve economic growth, and to begin investing in human
capital.
Critics on Human Capital Theory
(Paul Bouchard )
• Assumption 1: Human Capital is in investment in the
future.
• -It is impossible to accurately predict future labour
market needs. All the forecasting tools we have are
problematic.
• Assumption 2: More training leads to better work
skills.
• -Organizations value particular skills and what these
are often change over time. There are not necessarily
'better' skills, just ones that fit what serve the needs
of the organization at the time.
• Assumption 3: Educational institutions play a central role in the
development of human capital.
-Today our traditional educational institutions are not as relevant
or effective as they could be. Things change so fast that people
tend to learn more on the job.
Assumption 4: Employees need to improve their skills.
• -Work has not become more complex, in fact, with technology
things have become 'easier'. The need to improve one's skills
comes from having to compete in a job market with people who
are in many cases over-qualified.
• Assumption 5: Training enhances employability.
• -Many individuals do not have access to training and
thus access to jobs, while others may have access to
training, but not to mobility within the organization.
Assumption 6: Training can compensate for skill
shortages.
• -Bouchard argues there are not skill shortages, rather
there is a skill-mismatch. In other words, for various
reasons, individuals with appropriate skills do not find
work. Three potential reasons for this are: labour
market dynamics, structural discrimination, and
employee self-selection.
• Assumption 7: Employment and
unemployment are economic concepts.
• -The labour market is NOT a market like any
other. There are social forces present that
keep people from having equal access to
employment regardless of their skill and
experience.
• A major issue with Schultz' theory is that it places the
onus on the individual for becoming 'educated',
finding employment, and becoming a productive
member of society. The theory implies that if an
individual does not succeed it is their fault (i.e., they
are too lazy, not bright enough, etc.), as opposed to a
bias in the system. This is a tremendous burden
because for many their inability to find work is due to
factors beyond their control (i.e., socio-economic
status, ethnicity, gender, etc), and not necessarily to
their unwillingness or inability.
• Finally, knowledge and skill gained through
education is not necessarily what is important
to employers. As Bowles and Gintis (1976)
and many others have pointed out, the
characteristics that an individual who has
been through the formal educational system
possesses (i.e., obedience, responsibility,
etc), are in many cases more attractive to
employers than their knowledge and skill.
• Gary Becker, the 1992 Nobel Prize winner
for economics, built on the idea, explaining
that expenditure on education, training and
medical care could all be considered as
investments in human capital. "They are
called human capital," he wrote, "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."
 The productivity chain

Education Human capital Productivity

Wages Welfare
 The productivity chain

Education Human capital Productivity

Wages Welfare
Human Capital and Productivity
Human Capital

Working with Existing Developing

Technology Better New Technology

Acquiring Processing
New Information
Knowledge
 Education raises wages for both men and women:
Men
5
Wage relative to wage with

4,5
Primary
4
Secondary
3,5 Post-secondary
no schooling

3
2,5
2
1,5
1
0,5
0

USA
Indonesia

d'Ivoire

Slovenia
Peru
Thailand

Cote
Education raises wages for both men and women:
Women
Wage relative to wage with no 7

6 Primary
Secondary
5
Post-secondary
schooling

0
Indonesia

Slovenia
d'Ivoire

USA
Thailand

Peru

Cote
 Education and productivity
• Better educated farmers get a higher
return on their investments in
agriculture:
– In Africa, farmers who have completed 4
years of education (the minimum
necessary for literacy) produce, on
average about 8-10 percent more than
farmers who had not gone to school (Moock,
Jamison et al., Jamison & Moock)
– Technical and allocative efficiency (Welch,
Timmer)
 Education and productivity
(cont’d)

• Production function may matter:

– In simple tasks or in settings where
technology slow to change, effect of
education small
– In traditional farming, techniques passed
from generation to generation (T.W. Schultz)
– In piece-rate work in the Philippines, wage
not related to schooling after controlling for
gender and physical stature (Foster and
Rosenzweig)
 Human Capital and Wages

Education Human capital

Productivity

Wages Welfare