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Veronica Mitchell 1

Veronica Mitchell

OMDE 606

Assignment # 1

October 2, 2012

Human Capital Theory

Human Capital Theory (HCT) takes the individual person as the element of study.

Investment in the individual’s education, whether his/her own investment, the family’s investment or the state’s, results in a more skilled workforce and improved outcomes in productivity. This essay will define HCT and argue its strength and weaknesses.

Defining HCT

Human Capital Theory = Education+ Skill +Productivity +Earnings

According to Becker (1993), HCT suggests that investing in human capital leads to better economic productivity. Previously economic strength relied on physical assets like factories, equipment and land. Labor was a need, but increased the cost of the business that came from investing in capital equipment. Most of the economists agreed that education and health care are keys to improving human capital and eventually increases the economic production of the nation.

Babalola (2003) expresses the necessity behind investing in human capital as derived from three points:

1. That the new generation must be given the appropriate parts of the knowledge which

has already been accumulated by previous generations; Veronica Mitchell 2

2. That new generation should be taught how existing knowledge should be used to

develop new products, to introduce new processes and production methods and social services;

3. That people must be encouraged to develop entirely new ideas, products, processes and

methods through creative approach (Babalola, 2003, p. 158).

According to Schultz (1964), human capital consists of the increase of all former assets in education, on-the-job training, health, relocation, and any factors that increase productivity that lead to higher earnings. Workers have turned into capitalists by achieving knowledge and skills that contain economic worth.

Schultz (1961) education was a productive investment and was not merely a form of consumption. There are five major categories that progress individual abilities:

“(1) Health faculties and services

(2) On-the job training, including apprenticeship

(3) Formally organized education at elementary, secondary and higher levels

(4) Study programs for adults that are not organized by firms

(5) Migration of individuals and families to adjust to changing job opportunities”

(Schultz, 1961, p.9).

Strengths and weaknesses of HCT Veronica Mitchell 3

Labor economists place value on the idea of workers having inmate skills or acquired as a form of capital. The advantage of this idea is that it places value on improving one’s human capital through higher education, training, and attitudes towards work; and that this is what results in the difference in salary among employees. To further understand the influence human capital plays on determining productivity, it is important to illustrate each component as it relates to the HCT formula previously stated.

Natural ability (talent) refers to the abilities a person posses without any additional training. Workers have different amounts of natural skill that allows them to be more productive and excel in areas where others may not due to natural talents. “The Screening Theory (ST) would attribute most relevant skills to their talent”. T. Huelsmann (personal communication,

September 20, 2012) According to Dr. Huelsmann (2012), HCT and ST theorize that individuals whom are selected on foundation of education are seen as more productive. This would be a strength of HCT. Callahan argues “some people have a natural talent (math, painting) that makes them immediately more productive than others for certain occupations. T.E. Callahan

(personal communication, September 17, 2012) They can still become more productive by educating themselves to be better at their natural talent, thus combining both ideas.” (Callahan,

2012).

There can be no positive investment toward human capital regarding possible skills that may contribute to a worker’s productivity if the said skills are not being utilized, and therefore provide no real use to employers. Dr. Huelsmann made a good point when he said that talent is a malleable concept rather than a fixed one and that talent can be developed through education when kids are young. T. Huelsmann (personnel communication September 24, 2012) I am a Veronica Mitchell 4 firm believer that the first round of values and family socialization begins day one of life at our homes and are better know as “home school” we learned it at home.

Higher education for good reason has been the focus of much research; it is the most easily measured aspect of human capital investments. Typically, it is assumed workers with a higher education have higher earnings solely based on having a degree alone. “For example, if I am paid less than another PH.D., that must be because I have lower ‘skills’ in some other dimension that’s not being measure by my years of schooling— this is the infamous unobserved heterogeneity issue ” (Acemoglu & Author , 2002 , p.6).

Training, a primary method of acquiring education after formal schooling, allows workers to receive practical experience often associated with some set of skills useful for a particular industry. While experience cannot be taught in a classroom, workers limit their skill sets to a particular industry, with possibly a few skills applicable to other professions. Therefore training is a form of skill set and is a proven strength of the HCT. Must jobs provide some form of training in their organizations in order to teach individuals the way that company wants things done.

There is increasing recognition among economists that peer group effects on individuals exposed before they join the labor market may also affect their human capital significantly. This is referred to by many as pre-labor marketing. Associates of social groups often share experiences and knowledge. Democrats and Republicans share ideas related to their experiences as public officials of their individual states, which together determine rules for the entire country.

Though collaboration is beneficial in problem solving, employers run the risk of receiving prejudiced information. People of a social group usually have related thoughts and values Veronica Mitchell 5 restricting their ability to receive criticism from outsiders (Acemoglu & Author, 2002). This is one weakness of the HCT. The data received may be perceived to be valuable when it may not actually be.

Conclusion

The HCT explains the relationship connection investing in one’s education leads to higher skill sets, which adds stronger productivity with the expectation of higher wages. The end results shows when an individual invests in their education, they will be able to adapt the skills to produce and earn higher salaries (human capital) contributing to an overall better society.

Judging from the number of online and trade schools, Education has proven HCT to be true.

There are no longer jobs where a high school diploma is not required. Even McDonald’s views education for their workers as capital.

As Schultz himself wrote, “The man without skills and knowledge leaning terrifically against nothing” (Schultz, 1961).

References

Acemoglu, D. & Author, D. (2002) Lectures in Labor Economics. The basic theory of human capital. 2-6 Retrieved September 19, 2012 from http//economics.mit.edu/files/4689

Babalola, J.B. (2003) Budget Preparation and Expenditure Control in Education. In Babalola Veronica Mitchell 6

J.B. (ed) Basic Text in Educational Planning. Ibadan Awemark Industrial Printers.

Becker, G.S. (1976). Human Capital: A theoretical and empirical analysis, with special references to education. (2nd ed.) National Bureau of Economic Research Retrieved September 18, 2012 from http//www.nber.org/books/beck

Olaniyan, D.A. & Okemakinde, T. (2008). Human capital theory: Implications for educational development. European Journal of Scientific Research, 24(2). 157-162. Retrieved September 17, 2012 from http://www.eurojournals.com/ejsr_24_2_01.pdf

Schultz, T.W. (1961). Investment in human capital. The American Economic Review. 51(1). 1- 17. Retrieved September 16, 2012 from http://www.jstor.org/stable/