Human capital theory (清华大学,王一江).docVIP

Human capital theory Knowledge, ability and skills obtained through a person’s “investment” in acquiring them are called human capital (HC). Human capital theory in modern economics is pioneered by T. Shultz and G. Becker, both became Nobel Prize laureates partly because of their contributions to HC. HC theory is the cornerstone of modern economics. The theory is used to explain many labor market phenomena. The costs of investment in HC are in the forms of a) direct monetary expenses; b) forgone earnings or “opportunity cost”; and c) psychic losses because learning is often difficult and tedious. Like any investment, investment in HC is for a future return, in the form of higher future earnings. In classic HC theory, an individual’s HC investment decision is based on a cost-benefit analysis like in any investment decision. Gross benefits Earning A A Lost income pay- age of worker ments B Determining the optimal level of investment Present value = B1/(1+r) + B2/(1+r)2 +…+ BT/(1+r)T This present value is compared with the current marginal cost to determine if an additional unit of expenditure is worthwhile. Internal rate of return method. Use the same formula as above. Ask the question “how large could the discount rate be and still render the investment profitable?” Example of valuing human assets: ES, p.315. iii. Implications of the theory Those who dislike schools will invest less in HC. Those who have fewer opportunities will invest less. MC’ MC MB Younger people are more likely to attend college. Present-oriented people are less likely to go to college than forward-looking people (e.g., there are people for them current income is more important). College attendance will decrease if the costs of college rise. College attendance will decrease if income difference between college and HS graduates narrows. Those who bear the primary responsibilities for child be