Human capital accumulation and economic growth

The origin of the concept of Human Capital

In a paper I wrote some years ago I explained the origin of that concept of human capital as follows:

The term ‘human capital’ was initially controversial, but the analytical concept was not. The analysis of human capital has many famous parents and grandparents (Kiker 1966).

Sir William Petty published the first analysis of the value of human capital in 1690. There were sophisticated analyses of investments in education and training and their implications for wage differentials, labour productivity and occupational choice by Adam Smith in 1776, Alfred Marshall in 1890 and Milton Friedman and Simon Kuznets in 1945.

Richard Cantillon, John Locke, John Stuart Mill, Adam Smith and Karl Marx all proposed that training rather than natural ability was more important in understanding occupational wage differentials. Adam Smith and Alfred Marshall referred to education and training as capital investments in human beings.

Irving Fisher in 1912 and Arthur Pigou in 1928 pioneered the explicit use of the term ‘human capital’. Jacob Mincer, Theodore Shultz and Gary Becker popularised the use of the term in the mid-20th century. See Kiker (1966) for a history of the concept of human capital.

Robert Lucas on the role of the family in economic development

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Gary Becker summarises the analysis of human capital

Human capital analysis starts with the assumption that individuals decide on their education, training, medical care, and other additions to knowledge and health by weighing the benefits and costs. Benefits include cultural and other non-monetary gains along with improvement in earnings and occupations, while costs usually depend mainly on the foregone value of the time spent on these investments.

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Trends in Income Inequality and its Impact on Economic Growth – OECD – is it all about not enough graduates – updated?

The analysis of the OECD published overnight depends crucially upon how greater inequality reduces the ability of the lower income families to invest in human capital.

The OECD theory of inequality and lower growth is there is a financing constraint because of inequality that reduces economic growth because of less human capital accumulation by lower income families.

Proportion of adults aged 25–64 years with an educational qualification of at least upper secondary level and tertiary level, 1991–2009

Figure K4.1 Proportion of adults aged 25–64 years with an educational qualification of at least upper secondary level and tertiary level, 1991–2009

In a nutshell, not enough people are going to university. Apparently,  the explosion in tertiary educational attendance over the last generation, an increase of about 150%  for the adult population aged 25 to 64, was just not good enough.

But what about adults aged 25 to 34, recent graduates, how many of them are there?

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There was an explosion of young New Zealanders in the late 1990s who qualified for a degree from a university or diploma from a Polytech.

Under the hypothesis of the OECD about financial constraints retarding the accumulation of human capital among the lower middle class – the fourth decile of the income distribution –  even more young New Zealanders should have gone to university or Polytech.

Are there many New Zealanders left who are qualified and suited to tertiary education who do not go?

That is the crux of the OECD position: not enough lower-middle-class New Zealanders go on to obtain higher education and upgrade their skills because of financial constraints in a country was in interest free student loans,  means tested student allowances, and the government subsidises for 75% of all tuition fees. Tuition fees only equal 25% of the actual cost  and any one can get a student loan to cover this fee.

The Economic Case Against Majoring in Fun Things – The Atlantic

via http://www.theatlantic.com/business/archive/2014/11/the-economic-case-against-majoring-in-fun-things/383008/

I told you so – The Psychology Behind Messy Rooms: Why The Most Creative People Flourish In Clutter

via The Psychology Behind Messy Rooms: Why The Most Creative People Flourish In Clutter.

Deirdre McCloskey on Piketty’s definition of wealth in the Age of Human Capital

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The day that sex discrimination died – Solomon Polachek on the gender wage gap

Solomon Polachek was minding his own business back in 1975 looking for evidence to show occupational crowding and that women were pushed into low paid occupations by sex discrimination, and in particular, employer discrimination. About 60 per cent of women still work in just 10 occupations. the occupations which are female-dominated are often relatively poorly paid jobs

By chance, Polachek departed from the usual empirical strategy for estimating the male-female wage gap at that time.

Rather than include a dummy variable to estimate discrimination after various factors have been taken into account, he introduced dummy variables that took account of both gender and marital status. His results were startling.

He previously was able to explain about 35% of the wage gap using the data at hand and variables he was using.

This 35% gap dropped to 18% for single never married males and females, but his ability to explain the gender wage gap increased dramatically to over 60% for married spouse present males and females.

What more, the presence of children exacerbated the gender wage gap. Each child of less than 12 years old widened the female male pay disparity by 10%. Furthermore, large spacing intervals between children widened this gender wage disparity even further.

Subsequent research showed that marital status had the same effects on gender wage gaps in Germany, the UK, Austria, Switzerland, Sweden, Norway and Australia. Factors associated with dropping out of the labour market to care for children could explain up to 93% of the gender wage gap.

These findings are devastating to the notion that there is some sort of discrimination against women on the demand side of the labour market. As Polachek explains:

The gender wage gap for never marrieds is a mere 2.8%, compared with over 20% for marrieds. The gender wage gap for young workers is less than 5%, but about 25% for 55–64-year-old men and women.

If gender discrimination were the issue, one would need to explain why businesses pay single men and single women comparable salaries. The same applies to young men and young women.

One would need to explain why businesses discriminate against older women, but not against younger women. If corporations discriminate by gender, why are these employers paying any groups of men and women roughly equal pay?

Why is there no discrimination against young single women, but large amounts of discrimination against older married women?

… Each type of possible discrimination is inconsistent with negligible wage differences among single and younger employees compared with the large gap among married men and women (especially those with children, and even more so for those who space children widely apart).

The main drivers of the gender wage gap is simply unknown to employers such as whether the would-be recruit or employer is married, their partner is present, how many children they have, how many of these children are under 12, and how many years are there between the births of their children. These are the main drivers of the gender wage gap – all of which are factors totally unknown to employers and of no relevance to them in making a profit.

The drivers of the gender wage gap on the supply side of the labour market regarding the choices women make about having children, when they have children, and how this influences their investment in human capital, and in particular, in human capital that does not depreciate by that much because of intermittent labour force participation due to motherhood.

Occupational crowding hypotheses of the gender wage gap have the drawback of being an invisible hand explanation of social outcomes. Each individual, acting only to best secure her own rights and interests, act in such a way that the unintended outcome of a complex social interaction.

The specific unintended outcome that must arise from millions of choices of people acting in their own interest  throughout their lives is occupational segregation.

The market process of the invisible hand has both a filter and  and equilibrating mechanism. The filter is profits and loss to exclude through insolvency and bankruptcy those entrepreneurial choices that do not further consumer’s interests. The equilibrating mechanism – the mechanism that tells people which choices they should make – is price signals. Price signals guide individual choices towards the unintended outcome.

Those that argue that women are socialised to make particular choices such as mother were not paying attention to the 20th century and the radical social change over the course of that century, in particular in the role of women. As Gary Becker explains:

… major economic and technological changes frequently trump culture in the sense that they induce enormous changes not only in behaviour but also in beliefs.

A clear illustration of this is the huge effects of technological change and economic development on behaviour and beliefs regarding many aspects of the family.

Attitudes and behaviour regarding family size, marriage and divorce, care of elderly parents, premarital sex, men and women living together and having children without being married, and gays and lesbians have all undergone profound changes during the past 50 years.

Invariably, when countries with very different cultures experienced significant economic growth, women’s education increased greatly, and the number of children in a typical family plummeted from three or more to often much less than two.

 

The impact of street capital on the labour market prospects of inner-city youth

Dionissi Aliprantis wrote a superb paper on how the social skills developed to survive in the inner cities of America are not the skills that help you graduate from high school and get a job.

In the NLSY97, 26% of black inner-city youth report seeing someone shot by age 12, and 43% of black inner-city youth report the same by age 18.

The code of the street, the street smarted skills that inner-city black youth learn as teenagers to stay alive, do not pay off in regular society:

growing up in the ’hood means learning to some degree the code of the streets, the prescriptions and proscriptions of public behaviour. He must be able to handle himself in public, and his parents, no matter how decent they are, may strongly encourage him to learn the rules

The behaviours that do not help you survive in the street of the poor inner cities of America include include doing well in school, being civil to others, and speaking Standard English.

These skills that are the antithesis of the code of the street are exactly the skills valued by employers, especially employers of low paid workers. Employers of the low paid essentially want to recruit people who are friendly and reliable.

Dionissi Aliprantis found that exposure to street violence during childhood explains 20-35% of the high school dropout rate of inner-city youth.

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