Human Capital and How It Shapes America’s Future
Why You Need to Invest in Your Own Human Capital
BY KIMBERLY AMADEO Updated June 18, 2019
Human capital is the economic value of the abilities and qualities of labor that influence productivity. These qualities include higher education, technical or on-the-job training, health, and values such as punctuality. Investment in these qualities improves the abilities of the labor force. The result is greater output for the economy and higher income for the individual.
The investments are called human capital because workers aren’t separate from these intangible assets. In a corporation, it is called talent management and is under the human resources department.
In 1964, Nobel Prize winners and University of Chicago economists Gary Becker and Theodore Schultz created the theory of human capital. Becker realized the investment in workers was no different than investing in capital equipment, which is another factor of production. Both are assets that yield income and other outputs.
Becker’s research focused on education. His found that 25% of the rise in U.S. per capita incomes from 1929 to 1982 was due to increases in schooling.
He pointed out that the cost of education included time as well as money. Attendees lost the opportunity to work, travel, or have children. People only pursued an education if the potential income gain was greater than the cost. Before Becker’s work, economists treated all labor units as the same.
Becker differentiated between general and specific human capital. Specific human capital was training that would only benefit one company. General human capital would benefit the individual at any company. He found that companies would pay for specific human capital while individuals paid the general form. Firms wouldn’t invest in workers who might then be poached by competitors.
Becker’s theory explained how investing in education benefited people, companies, and countries. That theory is supported by research. States with the highest education scores also have the highest incomes. The top 10 states spend 50% to 100% more on education than the average, according to the National Center for Education Statistics.
A 2018 Federal Reserve study found that those with a college degree are paid 74% more than those with only a high school degree. This gives them enough income to save and acquire wealth. Education is necessary for economic mobility.
Education creates wealth in three ways:
- Families headed by educated parents earn more than those without college degrees. It gives the children a head start in life. They can attend private schools and receive better education themselves.
- Education improves the upward-mobility effect. It occurs when a child is born into a family without a college degree. Once the child earns a diploma, the entire family becomes wealthier. The study found it boosted family wealth by 20 percentiles. Families in which both the parents and child graduated college improved but only by 11 percentiles.
- It also works in reverse with the downward-mobility effect. Children with college-educated parents who didn’t graduate college fall 18 percentiles in wealth. Children whose parents didn’t graduate from college fell 10 percentiles in wealth.
America Is Slipping
America is ignoring the theory of human capital. Between 2010 and 2014, U.S. spending on elementary and high school education declined by 3%. It wasn’t because of declining student levels. Those grew by 1%. Meanwhile, other developed countries increased spending by 5%. That’s according to the Organization for Economic Cooperation and Development’s annual report of education indicators.
U.S. investment in higher education is also falling behind that of other countries.
Among Americans aged 25-34, only 44% have a college-level education. That’s lower than in 11 other countries. On the other hand, 66%of South Korea’s young people are college educated. America’s slippage means that fewer than 30% of American adults have more education than their parents.
One reason is that U.S. higher education costs more. According to the College Board, average annual tuition in a state school is $20,090 for state residents and $34,220 for out of state students. As a result, children from rich families were more likely to attend college.
America’s Human Capital Isn’t Distributed Evenly
Other countries are doing a better job achieving equity in education. Investment in human capital varies by race. The Economic Policy Institute reported that black families have $5.04 in net worth for every $100 held by white families.
The racial wealth gap exists even when all members are highly educated and have two-parent homes. Black families with graduate or professional degrees have $200,000 less in wealth than similarly educated white families. Blacks and Latinos face discrimination in wealth building despite their investment in their human capital.
For example, between 2004 and 2009, Wells Fargo Bank steered 30,000 black and Latino borrowers into subprime mortgages. They gave prime loans to white borrowers with similar credit profiles. Wells Fargo was ordered to compensate the minority borrowers for the extra costs incurred by higher interest rates and fees.
The racial wealth gap drags down the average wealth of the entire country. Between 1983 and 2013, black and Latino median wealth has fallen. During that time, white wealth increased. But U.S. median wealth fell from $78,000 to $64,000. As a result, there are fewer resources to invest in America’s next generation of human capital.
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