This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: Investment in Human Beings Volume Author/Editor: Universities-National Bureau Committee for Economic Research Volume Publisher: The Journal of Political Economy Vol. LXX, No. 5, Part 2 (University of Chicago Press) Volume ISBN: 0-87014-306-9 Volume URL: http://www.nber.org/books/univ62-3 Conference Date: Publication Date: October 1962 Chapter Title: Investment in Human Capital: A Theoretical Analysis Chapter Author(s): Gary S. Becker Chapter URL: http://www.nber.org/chapters/c13571 Chapter pages in book: (p. 9 - 49) INVESTMENT IN HUMAN CAPITAL: A THEORETICAL ANALYSIS' GARY S. BECKER Columbia Universityand National Bureau of Economic Research I. INTRODUCTION prove the physicaland mental abilitiesof SOME activitiesprimarily affect fu- people and thereby raise real income ture well-being,while others have prospects. their main impact in the present. People differ substantially in their Dining is an example of the latter,while economic well-being,both among coun- purchase of a car exemplifiesthe former. tries and among familieswithin a given Both earnings and consumptioncan be country.For a while economistswere re- affected: on-the-job training primarily lating these differencesprimarily to dif- affectsearnings, a new sail boat primari- ferencesin the amount of physicalcapital ly affects consumption, and a college since richer people had more physical education is said to affectboth. The ef- capital than others. It has become in- fectsmay operateeither through physical creasinglyevident, however, from studies resources,such as a sail boat, or through of income growth2that factors other human resources,such as a college edu- than physical resources play a larger cation. This paper is concerned with role than formerlybelieved, thus focus- activities that influencefuture real in- ing attention on less tangible resources, come throughthe imbeddingof resources like the knowledgepossessed. A concern in people. This is called investing in with investment in human capital, human capital. therefore,ties in closely with the new The many ways to invest include emphasis on intangible resources and schooling, on-the-job training, medical may be usefulin attempts to understand care, vitamin consumption,and acquir- the inequality in income among people. ing information about the economic The original aim of my study was to system.They differin the relativeeffects estimate the money rate of return to on earnings and consumption, in the college and high-schooleducation in the amount of resourcestypically invested, United States. In orderto set these esti- I in the size of returns,and in the extentto mates in proper context undertook a briefformulation of the theoryof invest- which the connection between invest- ment in human capital. It soon became ment and returnis perceived.But all im- clear to me, however, that more than a 1 I am greatlyindebted to the CarnegieCorpora- restatement was called for: while im- tion of New York forthe supportgiven to the Na- portant and pioneeringwork had been tionalBureau ofEconomic Research to studyinvest- done on the economic returnto various mentin educationand otherkinds of human capital. I benefitedgreatly from many discussionswith my 2 The evidence for the United States appears to colleagueJacob Mincer,and also withother partici- show that the growthin capital per capita explains pants in the Labor Workshopof Columbia Univer- only a small part of the growthin per capita income sity. Althoughmany personsoffered valuable com- and that the growthin "technology"explains most mentson thedraft prepared for the conference,I am ofit. On thissee S. Fabricant,Economic Progress and especially indebted to the detailed comments of EconomicChange: 34th Annual Reportof tIe National Theodore Schultz,George Stigler, and ShirleyJohn- Bureau of EconomicResearch (New York: National son. Bureau of Economic Research, 1954). 9 This content downloaded from 198.71.7.231 on Tue, 07 Apr 2015 12:57:41 UTC All use subject to JSTOR Terms and Conditions 1() GARY S. BECKER occupationsand education classes,3there The typical investorin human capital is have been few,if any, attempts to treat more impetuous and thus more likely to the process of investingin people from errthan is the typicalinvestor in tangible a general viewpoint or to work out a capital. What a diverseand possiblyeven broad set of empirical implications. I confusingarray! Yet all these as well as began then to prepare a general analysis many other important empirical impli- of investmentin human capital. cations can be derived fromvery simple As the work progressed, it became theoretical arguments. The purpose of clearerand clearerthat much more than this paper is to set out these arguments a gap in formaleconomic analysis would in some generality,with the emphasis be filled,for the analysis of human in- placed on empirical implications, al- vestmentoffered a unifiedexplanation of though little empirical material is pre- a wide range of empirical phenomena sented. My own empiricalwork will ap- whichhad eitherbeen given ad hocinter- pear in a later study. pretations or had baffledinvestigators. First, a lengthydiscussion of on-the- Amongthese are the following:(1) Earn- job trainingis presentedand then,much ings typicallyincrease with age at a de- morebriefly, discussions of investment in creasing rate. Both the rate of increase schooling,information, and health. On- and the rate of retardationtend to be the-job trainingis dealt with so elabo- positivelyrelated to the level of skill. (2) rately not because it is more important Unemploymentrates tend to be nega- than otherkinds of investmentin human tively related to the level of skill. (3) capital-although its importanceis often Firms in underdeveloped countries ap- underrated-but because it clearly illus- pear to be more "paternalistic" toward trates the effectof human capital on employeesthan those in developed coun- earnings, employment,and other eco- tries. (4) Younger persons change jobs nomic variables. For example, the close morefrequently and receivemore school- connectionbetween foregoneand direct ing and on-the-job training than older costs or the effectof human capital on personsdo. (5) The distributionof earn- earnings at differentages is vividly ings is positively skewed, especially broughtout. The extended discussionof among professional and other skilled on-the-job training paves the way for workers.(6) Abler persons receive more much brieferdiscussions of otherkinds of education and other kinds of training investmentin human beings. than others. (7) The division of labor is II. DIFFERENT KINDS OF INVESTMENT limited by the extent of the market. (8) A. ON THE JOB I In addition to the earlierworks of Smith,Mill, Theories of firmbehavior, no matter and Marshall,see H. Clark,Life Earningsin Selected how they differin other respects,almost Occupationsin theU.S. (New York: Harper & Bros., 1937); J. R. Walsh, "Capital Concept Applied to invariablyignore the effectof the produc- Man," QuarterlyJournal of Economics,February, tive process itself on workerproductiv- 1935; M. Friedmanand S. Kuznets,Incomefrom In- ity. This is not to say that no one dependentProfessional Practice (New York: National Bureau of EconomicResearch, 1945); G. Stiglerand recognizes that productivityis affected D. Blank, The Demand and Supply ofScientific Per- by the job itself;but the recognitionhas sonnel (New York: National Bureau of Economic not been fonnalized, incorporated into Research,1957); and T. W. Schultz,"Investment in Man: An Economist's View," Social ServiceReview, economic analysis, and its implications June,1959. worked out. We now intend to do just This content downloaded from 198.71.7.231 on Tue, 07 Apr 2015 12:57:41 UTC All use subject to JSTOR Terms and Conditions INVESTMENT IN HUMAN CAPITAL: A THEORETICAL ANALYSIS 11 that, placing special emphasis on the where W equals wages or expenditures broader economicimplications. and MP equals the marginalproduct or Many workersincrease their produc- receipts. Firms would not worry too tivityby learningnew skills and perfect- much about the relation between labor ing old ones while on the job.. For ex- conditions in the present and future ample, the apprentice usually learns a partly because workerswere only hired completelynew skill while the internde- forone period,and partlybecause wages velops skills acquired in medical school, and marginal products in futureperiods and both are more productiveafterward. would be independentof a firm'scurrent On-the-job training, therefore, is a behavior. It can thereforelegitimately be process that raises future productivity assumed that workershave unique mar- and differsfrom school trainingin that ginal products (for given amounts of an investmentis made on the job rather other inputs) and wages in each period, than in an institutionthat specializes in which are, respectively,the maximum teaching. Presumably,future productiv- productivityin all possible uses and the ity can be improved only at a cost, for market wage rate. A more complete set otherwisethere would be an unlimited ofequilibrium conditions would be the set demand fortraining. Included in cost are (2) a value placed on the time and effortof MPt= Wt, trainees, the "teaching" provided by where t refers to the tth period. The others,and the equipmentand materials equilibriumposition for each periodwould used. These are costs in the sense that depend only on the flows during