What Is Human Capital? How It Can Shape America's Future

Opportunities and Limitations of Human Capital

diverse college graduates
•••

 Photo by Visual Mozart/Getty Images

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.

What Is Human Capital?

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. He found that 25% of the rise in U.S. income per capita income from 1929 to 1982 was due to increases in schooling.

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

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.

The chart below shows the correlation between education level and median wages.

Human Capital and Education

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:

  1. 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. 
  2. 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 spots in the rankings. Families in which both the parents and child graduated college improved but only by 11 spots in the rankings.
  3. It also works in reverse with the downward-mobility effect. Children with college-educated parents who didn't graduate college fell 18 places in rankings in wealth. Children whose parents didn't graduate from college fell 10 places in rankings in wealth.

Education in America

America is ignoring the theory of human capital. Between 2010 and 2014, U.S. spending on elementary and high school education declined by 3%, according to the Organization for Economic Cooperation and Development's annual report of education indicators. It wasn't because of declining student levels. Those grew by 1%. Meanwhile, other developed countries increased spending by 5%.

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. 

One reason is that U.S. higher education costs more. According to the College Board, the average annual cost of tuition, fees, room, and board for an in-state college in 2019 was $21,950 for state residents and $38,330 for out-of-state students. As a result, children from rich families were more likely to attend college. 

Human Capital and the Racial Wealth Gap

Other countries are doing a better job achieving equity in education. Investment in human capital varies by race. The Federal Reserve's Survey of Consumer Finances found that white families had almost 10 times the median wealth in 2016 than did Black 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 these borrowers for the extra costs incurred by higher interest rates and fees.

The racial wealth gap drags down the average wealth of an entire country. Even when education is equal, there's still a huge disparity between the median and mean net worths of white and Black people. As a result, there are fewer resources and opportunities for people to invest in their own, as well as the next generation's, human capital.

Key Takeaways

  • Human capital is the economic value of the abilities and qualities of labor that influence productivity.
  • Education plays a big role in human capital, and it can lead to higher incomes and net worths.
  • There is still a large racial wealth gap and it needs to close in order to better allow different groups of people from various backgrounds the opportunity to invest in their human capital.

Article Sources

  1. Gary S. Becker. "Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education." The University of Chicago Press, 1993.

  2. Federal Reserve Bank of St. Louis. "The Financial Returns From College Across Generations: Large But Unequal." Accessed June 16, 2020.

  3. OECD. "Education at a Glance 2017." Accessed June 16, 2020.

  4. Robert E. Purser, David Forbes, and Adam Burke. "Handbook of Mindfulness," Page 459. Springer, 2016.

  5. College Board. "Trends in College Pricing 2019." Accessed June 16, 2020.

  6. Economic Policy Institute. "The Racial Wealth Gap: How African-Americans Have Been Shortchanged Out of the Materials to Build Wealth." Accessed June 16, 2020.

  7. U.S. Department of Justice. "Justice Department Reaches Settlement with Wells Fargo Resulting in More Than $175 Million in Relief for Homeowners to Resolve Fair Lending Claims." Accessed June 16, 2020.

  8. Board of Governors of the Federal Reserve System. "Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence from the Survey of Consumer Finances." Accessed June 16, 2020.