Woodhall1987.pdf

Human not be surprised, however, if the proportion devoted to knowledge production levels off before long. Bibliography Machlup F1962 The Production and Distribution of Knowledge in the United States. Princeton University Press, Princeton, New Jersey Machlup F 1982 Knowledge: Its Creation, Distribution, and Economic Significance, Vol. 2: The Branches of Learning. Princeton University Press, Princeton, New Jersey

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Machlup F, Kronwinkler T1975 Workers who produce knowledge: Steady growth, 1900 to 1970. Weltwirtschaftliches Arch. 3: 752-59 Machlup F, Leeson K1978-80 Information Through the Printed Word: The Dissemination of Scholarly, Scientific, and Intellectual Knowledge. Praeger, New York Organisation for Economic Co-operation and Development 1981 Information Activities, Electronics and Telecommunications Technologies: Impact on Employment, Growth, and Trade, OECD, Paris Porat U, Rubin M R 1977 The Information Economy. Office of Telecommunications, Washington, D C

Human Capital Concepts M. Woodhall The concept of human capital refers to the fact that human beings invest in themselves, by means of education, training, or other activities, which raises their future income by increasing their lifetime earnings. Economists use the term "investment" to refer to expenditure on assets which will produce income in the future, and contrast investment expenditure with consumption, which produces immediate satisfaction or benefits, but does not create future income. Assets which will generate income in the future are called capital. Traditionally, economic analysis of investment and capital tended to concentrate on physical capital, namely machinery, equipment, or buildings, which would generate income in the future by creating productive capacity. However, a number of classical economists, notably Adam Smith, pointed out that education helped to increase the productive capacity of workers, in the same way as the purchase of new machinery, or other forms of physical capital, increased the productive capacity of a factory or other enterprise. Thus, an analogy was drawn between investment in physical capital and investment in human capital. The concept was not fully developed, however, until the early 1960s when the American economist Theodore Schultz analysed educational expenditure as a form of investment (Schultz 1961), the Journal of Political Economy in the United States published a supplement on "Investment in Human Beings" in 1962, and Gary Becker published a book with the title Human Capital (Becker 1964, 2nd edn. 1975) which developed a theory of human capital formation and analysed the rate of return to investment in education and training. Since that time the concept of human capital has dominated the economics of education and has had a powerful influence on the analysis of labour markets, wage determination, and other branches of economics, such as the analysis of economic growth, as well as expenditure on health care and the study of migration. For it is recognized that these also represent investment in human capital, since they can help to determine the earning capacity of individuals, and therefore increase their lifetime incomes.

However, investment in human capital remains a controversial issue. Attempts to measure the rate of return to investment in education have been attacked by critics who argue that education does not increase the productive capacity of workers but simply acts as a "screening device" which enables employers to identify individuals with higher innate ability or personal characteristics which make them more productive. A summary of this controversy is given below, together with a brief review of research on investment in education and some other applications of the concept of human capital. However, more detailed treatment of all these issues is provided in separate entries. 1. Measuring the Rate of Return to Investment Human Capital

in

When economists refer to expenditure on education and training as investment in human capital, they are doing more than pointing to analogies between education and investment in physical capital. They are asserting that it is possible to measure the profitability of investment in human capital using the same techniques of costbenefit analysis and investment appraisal that have been traditionally applied to physical capital. The profitability, or rate of return on investment, is a measure of the expected yield of the investment, in terms of the future benefits, or income stream generated by the capital, compared with the cost of acquiring the capital asset. Cost-benefit analysis is designed to express all the costs and benefits associated with an investment project in terms of a single figure, the rate of return, which shows the rate of interest at which the present discounted value of future income is exactly equal to the present discounted value of costs. This enables different projects to be compared and an optimum investment strategy consists of identifying and investing in projects offering the highest rate of return, or profitability. If money devoted to education, training, or health care is regarded as investment in human capital, since it raises the lifetime earnings of workers who are better 21

Human

Capital

Concepts rates of return to educational investment, based on surveys of the earnings of workers of different educational levels in 44 countries in the period from 1958 to 1978 reveal, according to Psacharopoulos (1981 p. 326), four underlying patterns:

educated and trained or more healthy than other workers, then techniques of cost-benefit analysis can be used to compare the economic profitability of different types or levels of education, of on-the-job compared with off-the-job training, or of different types of medical treatment. It should also be possible to compare rates of return to investment in human capital and physical capital, in order to discover whether it is more profitable to invest in men and women or machines. Investment in human capital produces benefits both to the individual and to society as a whole. The individual who takes part in education or vocational training benefits by increasing his or her chances of employment and by increased lifetime earnings. These additional earnings, after allowance for payment of taxes, can be compared with the direct and indirect costs of education that must be borne by the individual, including fees, expenditure on books or equipment, and earnings forgone while in school, college, or university. This provides a measure of the private rate of return to investment in education or other form of human capital. Both the costs and benefits of education also affect society as a whole, since society benefits from the increased productivity of educated workers. Throughout the world this is recognized by governments who pay some or all of the costs of education, and provide free or subsidized tuition in schools or higher education institutions. The costs and benefits to society can be compared by means of the social rate of return. The question of the profitability of different types and levels of education and training, and the question of the relative yield of investment in human capital and physical capital have attracted a considerable amount of research activity since the 1960s, as well as provoking fierce disagreements among economists and educational planners. Psacharopoulos has reviewed attempts to measure the social and private rate of return to investment in education in 32 countries (Psacharopoulos 1973) and more recently has updated this survey of research on the returns to education by analysing the results of cost-benefit analysis of education in 44 countries (Psacharopoulos 1981). Estimates of social and private

(a) The returns to primary education (whether social or private) are the highest among all educational levels. (b) Private returns are in excess of social returns, especially at the university level. (c) All rates of return to investment in education are well above the 10 percent common yardstick of the opportunity cost of capital. (d) The returns to education in less developed countries are higher relative to the corresponding returns in more advanced countries. 2. The Profitability Physical Capital

d

Capital

a

Private

Social

f

e

Region or country type

N

Prim.

Sec.

High.

Prim.

Sec.

High.

Africa Asia Latin America LDC average Intermediate Advanced

(9) (8) (5) (22) (8) (14)

29 32 24 29 20 (b)

22 17 20 19 17 14

32 19 23 24 17 12

29 16 44 27 16 (a)

17 12 17 16 14 10

12 11 18 13 10 9

a Source: Psacharopoulos (1973 p. 86) b Not computable because of lack of a control group of illiterates c N = Number of countries in each group d Prim. = primary educational level e Sec. = secondary educational level f High. = higher educational level

22

Versus

The rates of return that are reviewed by Psacharopoulos are summarized in Table 1, which shows the average private and social rate of return for primary, secondary, and higher education in less developed, intermediate, and economically advanced countries. These rate of return estimates refer to single years, and therefore do not show how rates of return change over time, although the average rate of return is calculated from estimates for years which range over a 20-year period. However, there are very few countries for which it is possible to calculate rates of return on an historical time-series basis. Data exist on earnings of workers in the United States classified by educational level since 1939. Estimates of rates of return to secondary and higher education between 1939 and 1976 suggest that the returns to education are falling, although not by a large amount. Data from Colombia also suggest that between 1963 and 1974 the returns to education declined, but still remained profitable.

Table 1 The returns to education by region and country type (%)

c

of Human

Human Table 2 The returns to8 alternative forms of capital by level of economic development Physical capital

Level of development Per capita income under $1,000 (7 countries) Per capita income over $1,000 (6 countries)

Human capital

15.1

<

19.9

10.5

>

8.3

a Source: Psacharopoulos (1981 p. 329)

The results of all these studies confirm that expenditure on education does represent investment in human capital, and that it is a profitable investment, both for the individual and for society, although some critics deny that the earnings of educated workers provide an adequate measure of the economic benefits of education. It is difficult, however, to answer the question of whether human or physical capital represents the more profitable form of investment. An early attempt to answer this question was called "Investment in Men versus Investment in Machines?" (Harberger 1965), and this is still a question that is of vital concern to economists and planners. Psacharopoulos examined estimates of the returns to physical capital in both developed and developing countries and concluded: (a) the returns to both forms of capital are higher in developing countries, which reflects the differences in relative scarcities of capital in either form in developed and developing countries; and (b) human capital is a superior investment in developing countries but not in developed countries, as indicated by the ' reversal of the inequality signs in Table 2 (Psacharopoulos 1973 p. 86). 3. How Does Human Productivity?

Capital Increase

Workers'

The earliest explanations of the concept of human capital suggested that education or training raised the productivity of workers, and hence increased their lifetime earnings, by imparting useful knowledge and skills. However, this assumption was soon attacked by critics who argued that the higher earnings of educated workers simply reflected their superior ability, rather than the specific knowledge and skills acquired during the educational process. In addition, it was argued that highly educated workers are more likely to come from higher social class groups in society, and to work in urban rather than rural areas. Many estimates of rates of return to education therefore adjust the observed earnings differentials of educated people to allow for the influence of other factors on earnings. Since ability is one of the main factors that may determine earnings, this is often called the "ability

Capital

Concepts

adjustment" or alternatively the "alpha coefficient", where "alpha" (a) represents the proportion of the extra earnings of the educated, which is assumed to be due to education. Regression analysis and earnings functions suggest that an appropriate value for the a coefficient is between 0.66 and 0.8 (Psacharopoulos 1975). Further details of research on this problem, together with an explanation of earnings functions, will be found in separate entries. More recently, however, critics have gone further, and have argued that education does not improve productivity by imparting necessary knowledge and skills, but simply acts as a screening device, which enables employers to identify individuals who possess either superior innate ability or certain personal characteristics, such as attitudes towards authority, punctuality, or motivation, which employers value and which are therefore rewarded by means of higher earnings. This argument is called by various names in the literature, including the "screening" or "filtering" hypothesis, or alternatively the "certification" or "sheepskin" argument, since it is suggested that education simply confers a certificate, diploma, or "sheepskin", which enables the holder to obtain a well-paid job without directly affecting his or her productivity. This argument has attracted considerable controversy, but has been refuted by a number of economists who argue that while a "weak" version of the screening hypothesis is undoubtedly true, since employers do use educational qualifications in selecting employees, as a proxy for other characteristics, there is no evidence to support the "strong" versions of the hypothesis, that education has no direct effect on productivity. The fact that employers continue to pay educated workers more than uneducated throughout their working lives refutes this (Psacharopoulos 1979). Even if the "strong" version of the screening hypothesis is rejected, and it is difficult to see why no cheaper means of identifying workers with desired characteristics has not been developed if education really had no effect on productivity, it is nevertheless true that the idea of education as a screen or filter has been important in influencing recent directions in research in the economics of education. Blaug (1976) in a review of research on investment in human capital, which he describes as a "slightly jaundiced survey" of the empirical status of human capital theory, predicts that in time, the screening hypothesis will be seen to have marked a turning point in the "human investment revolution in economic thought", a turning point to a richer, still more comprehensive view of the sequential life cycle choices of individuals. (Blaug 1976 p. 850)

The reason why the screening hypothesis is important is that it has focused attention on the precise way in which education or other forms of investment in human capital influence productivity, and has served as a reminder that education does far more than impart knowledge and skills. The reason why employers con23

Human

Capital

Concepts

tinue to prefer educated workers is that not only does the possession of an educational qualification indicate that an individual has certain abilities, aptitudes, and attitudes, but the educational process helps to shape and develop those attributes. In other words, it is now increasingly recognized that education affects attitudes, motivation, and other personal characteristics, as well as providing knowledge and skills. This means that the concept of investment in human capital is still valid, but it must be extended to include activities which affect personal attributes as well as skills, and it must recognize that such activities increase workers' productivity in complex ways. 4. Other Forms of Investment

in Human

Capital

Other forms of investment in human capital also develop the personal attributes that help to determine a worker's productivity. On-the-job training and work experience and the process of job search, including migration, as well as health care, can all increase earning capacity, and can therefore be regarded as investment in human capital. Blaug's survey of research on human capital links all these activities together. The concept of human capital, or "hard core" of the human-capital research program is the idea that people spend on themselves in diverse ways, not for the sake of present enjoyments, but for the sake of future pecuniary and non pecuniary returns . . . . All these phenomena— health, education, job search, information retrieval, migration and in-service training—may be viewed as investment rather than consumption, whether undertaken by individuals on their own behalf or undertaken by society on behalf of its members. What knits these phenomena together is not the question of who undertakes what, but rather the fact that the decision-maker, whoever he is, looks forward to the future for the justification of his present actions . . . . The human-capital research program has moved steadily away from some of its early naive formulations . . . (but) it has never entirely lost sight of its original goal of demonstrating that a whole range of apparently disconnected phenomena in the world are the outcome of a definite pattern

of individual decisions having in common the features of forgoing present gains for the prospect of future ones. (Blaug 1976 pp. 829, 850)

Not only does research in human capital now link those apparently disparate activities together, but many programmes that have been developed in recent years in response to high levels of unemployment among young people are increasingly concerned to forge closer links between education, training, and work experience. Programmes such as the Youth Opportunities Programme and Youth Training Scheme in the United Kingdom and a number of programmes for young people in Europe are designed to provide alternating periods of vocational education, training, and work experience, recognizing that all these activities represent investment in human capital (CEDEFOP 1982). Bibliography Becker G S 1975 Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. 2nd edn. Princeton University Press, Princeton, New Jersey Blaug M 1976 The empirical status of human capital theory: A slightly jaundiced survey. /. Econ. Lit. 14: 827-55 European Centre for the Development of Vocational Training (CEDEFOP) 1982 Alternance Training for Young People: Guidelines for Action, CEDEFOP, Berlin Harberger A C 1965 Investment in men versus investment in machines: The case of India. In: Anderson C A, Bowman M J (eds.) 1965 Education and Economic Development. Aldine, Chicago, Illinois Psacharopoulos G 1973 Returns to Education: An International Comparison. Elsevier, Amsterdam Psacharopoulos G1975 Earnings and Education in OECD Countries. Organisation for Economic Co-operation and Development, Paris Psacharopoulos G 1979 On the weak versus the strong version of the screening hypothesis. Econ. Letters 4: 181-85 Psacharopoulos G 1981 Returns to education: An updated international comparison. Comp. Educ. 17: 321-41 Schultz T W (ed.) 1961 Investment in Human Beings. University of Chicago Press, Chicago, Illinois

On-the-job Training M. J. Bowman The term "on-the-job training" is used in several overlapping ways, all of which are usually focused on postschool learning. The first section of this entry discusses briefly the scope and variations in what is often included with on-the-job training in the descriptive and nontechnical literature. The second and third sections deal with the meanings and treatments of on-the-job training in human capital investment theory and its applications. Attention is then turned in the fourth section to a wellknown view of institutional adaptations associated with on-the-job training in a dynamic context, characterizing some of the work on what has come to be labeled 24

"internal labor markets" (internal, that is, to a particular firm or agency). Finally, the largely unseen informal economy is noted along with the training and learning activities that go on in its many crannies. 1. On-the-job

Training in Nontechnical

Usage

At one extreme, the label on-the-job training is used quite literally to refer to organized instruction in the work place. Somewhat less narrowly (and more often) the scope of what is included covers job-related training sponsored by the employer or required as a condition