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Human Capital Policy NBER WORKING PAPER SERIES HUMAN CAPITAL POLICY Pedro Carneiro James Heckman Working Paper 9495 http://www.nber.org/papers/w9495 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2003 James Heckman is Henry Schultz Distinguished Service Professor at the University of Chicago and Senior Fellow of the American Bar Foundation. Pedro Carneiro is a graduate student at the University of Chicago. The research reported here was supported by the National Science Foundation grants SES-93-21-048, 97-30- 657, and 00-99-195; NICHD grant R01-34598-03; NIH grant R01-HD32058-03, and the American Bar Foundation. Carneiro was funded by Fundacao Ciencia e Tecnologia and Fundacao Calouste Gulbenkian. We have benefited from comments received from David Bravo, Mark Duggan, Lars Hansen, Robert LaLonde, Steve Levitt, Dayanand Manoli, Dimitriy Masterov, Casey Mulligan, Derek Neal, Flavio Rezende-Cunha and Je. Smith on various aspects of this paper. We have benefited from comments on the first draft received from George Borjas, Eric Hanushek, Larry Katz, Lance Lochner, Lisa Lynch and Larry Summers. Dayanand Manoli and Dimitriy Masterov provided valuable research assistance for which we are grateful. This work draws on and substantially extends Heckman (2000) and Heckman and Lochner (2000). Correspondence to: James J. Heckman, Department of Economics, University of Chicago, 1126 E. 59th Street, Chicago IL 60637 USA. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ©2003 by James Heckman and Pedro Carneiro. All rights reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including notice, is given to the source. Human Capital Policy James Heckman and Pedro Carneiro NBER Working Paper No. 9495 February 2003 JEL No. I2, I28 ABSTRACT This paper considers alternative policies for promoting skill formation that are targetted to different stages of the life cycle. We demonstrate the importance of both cognitive and noncognitive skills that are formed early in the life cycle in accounting for racial, ethnic and family background gaps in schooling and other dimensions of socioeconomic success. Most of the gaps in college attendance and delay are determined by early family factors. Children from better families and with high ability earn higher returns to schooling. We find only a limited role for tuition policy or family income supplements in eliminating schooling and college attendance gaps. At most 8% of American youth are credit constrained in the traditional usage of that term. The evidence points to a high return to early interventions and a low return to remedial or compensatory interventions later in the life cycle. Skill and ability beget future skill and ability. At current levels of funding, traditional policies like tuition subsidies, improvements in school quality, job training and tax rebates are unlikely to be effective in closing gaps. Pedro Carneiro James J. 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