What Is Human Capital?

College students sitting at tiered desks in a lecture hall.
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DEFINITION

Human capital is the economic value of the abilities and qualities of labor that influence productivity, such as education.

Definition of Human Capital

Human capital recognizes the intangible assets and qualities that improve worker performance and benefit the economy. These qualities cannot be separated from the people who receive or possess them.

In the 1950s and early 1960s, Nobel Prize winners and University of Chicago economists Gary Becker and Theodore Schultz were among those primarily responsible for the development of 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 differentiated between general and specific human capital.

  • Specific human capital: Training or education that benefits only one company
  • General human capital: Training or qualities that benefit the individual at any company

Becker found that companies were more likely to pay for specific human capital while individuals paid for general human capital investments. Firms were less interested in investing in workers who might then be poached by competitors.

Types of Human Capital

Human capital includes any human quality or value that can improve economic output and productivity.

Because these are intangible assets that cannot be separated from individual workers, quantifying them can be difficult. However, they consistently lead to increased economic performance.

Human capital can include qualities like:

  • Education
  • Technical or on-the-job training
  • Health
  • Mental and emotional well-being
  • Punctuality
  • Problem-solving
  • People management
  • Communication skills

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.

Human Capital and Education

Becker's research focused on education. Becker pointed out that the cost of education included time as well as money.

Pursuing an education means that students lost the opportunity to work, travel, or have children. People only pursued an education if the potential income gain was greater than the cost.

Becker's research was limited in that it focused much on the education of white men, rather than diverse groups of people.

Becker’s theory explained how investing in education benefited people, companies, and countries. The majority of the states that spend the most on education also have median household incomes that are higher than the national median, which was $67,521 in 2020, a decrease of 2.9 percent from the 2019 median of $69,560.

States With Top Education Spending, FY 2019
State Education Spending Per Pupil Median Household Income
New York $25,139 $68,304
District of Columbia $22,406 $88,311
Connecticut $21,310 $79,043
New Jersey $20,512 $85,239
Vermont $20,315 $66,902
Data from U.S Census Bureau: U.S. School System Spending Per Pupil by Region; 2020 Median Household Income in the United States

States with higher education scores generally also have higher incomes.

Human Capital and Economic Mobility

Investment in human capital benefits individual workers as well as the economy in which they participate, creating greater earning potential and an increased ability to build wealth. This is particularly true of education.

A Federal Reserve study found that in 2019, the median family income of those with a college degree was $95,700 as compared to $45,800 for families with just a high school degree. This gives them enough income to save and acquire wealth, which is key to economic mobility.

Improved Childhood Education

Families headed by educated parents earn more than those without college degrees. They are likely to either live in wealthier neighborhoods with better schools or can afford private schools.

These children then receive a better education than children of lower-earning parents. As a result, children of better-educated parents have greater earning potential and economic mobility. 

The Familial Effect of College

The pursuit of higher education can influence future generations, according to research from the Federal Reserve.

The Fed study found the education of an individual is strongly related to the education of their parents, meaning the more familiar and successful the parents are with higher education, the more likely it is the adult child has a four-year degree. The Fed in turn found that a continuing generation of college graduates is significantly higher for younger generations.

In fact, according to the Fed's 2018 Survey of Household Economics and Decisionmaking, 16% of adults age 25 to 64 were first-gen grads while 21% were continuing-gen grads.

Education Investment in the United States

The United States does not invest in human capital like education at the same level that other developed countries do.

Between 2012 and 2017, U.S. public spending on education increased by around 10%. This was slightly higher than the average for all countries surveyed although other developed countries increased spending even more.

U.S. investment in higher education is also falling behind that of other countries. Among Americans aged 25-34, only 50% have a college-level education. That's lower than in nine other countries, such as South Korea and Ireland where 70% of young people are college-educated. 

One reason for lower education investment is that higher education in the U.S. is more expensive than in many other countries. The average annual cost of tuition, fees, room, and board for a four-year public college for the 2020-2021 school year was $22,180 for state residents and $38,640 for out-of-state students.

As a result, children from families that are already wealthy are more likely to attend college. This decreases economic mobility in the United States by limiting who receives a college education. It also limits the increases in human capital, which in turn limits economic growth.

Key Takeaways

  • Human capital is the economic value of the abilities and qualities of labor that influence productivity. These are qualities like education, health, and on-the-job training. Human capital is intangible but cannot be separated from workers.
  • Education is one of the most important elements of human capital, leading to increased economic output, higher individual income, and increased economic mobility for families.
  • In the United States, limited investment in education plus the costs of higher education result in limited economic mobility and stagnating growth in human capital. This in turn limits the potential for economic growth.

Article Sources

  1. The Library of Economics and Liberty. "Gary Stanley Becker."

  2. University of Chicago Chronicle. "Theodore Schultz."

  3. Oxford Handbooks Online. "The Oxford Handbook of Human Capital."

  4. United States Census Bureau. "Income and Poverty in the United States: 2020."

  5. Federal Reserve. "Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances," Page 7.

  6. Federal Reserve Bank of St. Louis. "First-Generation College Graduates Get a Financial Boost, but Don’t Catch Up."

  7. Board of Governors of the Federal Reserve System. "Survey of Household Economics and Decision Making."

  8. OECD. "Education at a Glance 2020," Page 312.

  9. OECD. "Indicator A1. To What Level Have Adults Studied?" Page 5.

  10. College Board. "Trends in College Pricing and Student Aid 2020," Page 10.