Human Capital Theory

E D U C A T I O N A N D D EV E L O P M E N T

Lecture 5

PLG515

5 October 2015

Pre-Lecture Debate

An increase in the number of

college/university graduates is beneficial
for the socio-economic development of a
country.

vs
The expansion of higher education is
detrimental to the socio-economic
development of a country.

Contents

1.

The idea
The background

2.
3.

The theory

Education as investment in human capital

4.

Individual returns of the investment in education

5.
6.

Criticism of the human capital theory

1. The idea
There is such a thing as investment in human capital []. So soon
as this is recognised, the distinction between economy in
consumption and economy in investment becomes blurred.
[] consumption is investment in personal productive capacity.
This is especially important in connection with children: to reduce
unduly expenditure on their consumption may greatly lower their
efficiency in after-life. Even for adults [] a check to personal
consumption is also a check to investment.
A. C. Pigou, 1928

2. The background

2. The background
Modernization: the process by which agrarian societies

are transformed into industrial ones

Consequences of modernization to labor:

The nature of labor has changed people work smarter due to

Technological
A

more efficient use of knowledge

The
A

innovations

role of knowledge has become more important

higher proportion of white collar jobs (Drucker)

Education has become necessary from being a luxury

2. The background
Consequences of modernization to labor:

Women have entered the labor market due to

Unequal sex ratio lack of males after the World Wars

Changes in the types and structure of jobs

Reduced fertility or is this the result of female labor?

Financial reasons or is female labor a covert salary cut?

More working women > it is more difficult to find a job for the less
educated (of both sexes)

3. The theory

3. The theory
Human beings seen as capital goods

Related to the theories of Adam Smith and Karl Marx

Human beings need useful knowledge and skills for their

subsistence
Knowledge and skills are a form of capital
Direct investment in education and health results in economic

development
Development of human capital

Improves the quality and productivity of the labor force

Increases the competitiveness of national economies in the global market

4. Education as investment in human capital

4. Education as investment in human capital

Education
Is

a basic component of social, economic and political

development

Has

an economic value

Contributes

to economic growth (Adam Smith, 1776;

Wheeler, 1980)

4. Education as investment in human capital

Investment in education
Contributes

Increases

to national economic growth (Marris, 1982)

the income of the poor (Jamison and Lau,

1982)
Improves

the productive skills and capacities of the

national labor force (Denison, 1962; Schultz, 1961)

4. Education as investment in human capital

Investment in education
Has

a significantly higher return rate than investment in

physical capital > most of the economic growth comes
from investment in education (Schultz, 1963)

Based on the above notions, the World Bank has

provided loans for educational development since

1962

5. Individual returns of the investment in education

Education is an investment for the students and

their families, too:

The

qualification of the individual determines ones labor

opportunities and choice

High-prestige

In

jobs usually require high qualification

most societies, higher degree means higher income

5. Individual returns of the investment in education

Education is an investment for the students and

their families, too:

The

income gap is not the same, however, throughout the

life cycle

Age-earning

profiles an example from Thailand:

5. Individual returns of the investment in education

BUT
The ability problem

Highly educated individuals tend to have the ability, self-discipline

and motivation to earn higher salaries

Higher degree and higher income may be result of the same

individual abilities

5. Individual returns of the investment in education

BUT
Sometimes the returns are insufficient

Many skilled blue collar jobs offer high reward

Expansion theory (Archer)

Deflation in value of college degree

Percent of college graduates has increased substantially

The progress of the disadvantaged offset by education inflation

It is not the knowledge and skills of humans but credentialism in the

society what has increased

Education is a channel of social reproduction (Bourdieu)

6. Criticism of the human capital theory

6. Criticism of human capital theory

Investment or consumption?
It

is not appropriate to regard expenditure for

education as an investment

6. Criticism of the human capital theory

Investment in human capital does not work automatically

Discrepancy between labor demand and the skills of new graduates

The dominant value system and working culture of education, health

etc. employees may reduce or counter the impact of investment

It is the quality of education what really matters

Test scores show many students lack functional abilities

Investment does not guarantee better results

6. Criticism of the human capital theory

Sometimes the returns are insufficient

Many skilled blue collar jobs offer high reward

Educational expansion theory (Archer, 1982)

Deflation in value of college degrees

Percent of college graduates has

increased substantially

The progress of the disadvantaged

offset by educational inflation

It is not the knowledge and skills of humans but

Everybody

Nobody

credentialism in the society what has increased

Education is a channel of social reproduction (Bourdieu & Passeron, 1990)

Statements for debate (Lecture 6)

Alternative education and home schooling are
beneficial to the learners.
(deschooling, diploma disease, alternative education)

vs
Alternative education and home schooling are
harmful to the learners.
(alternative education, functionalist theory, human capital theory)