(p. xiii) Foreword by Gary S. Becker
(p. xiii) Foreword by Gary S. Becker
The human capital ‘revolution’ began in the 1950s and early 1960s with the research of Theodore W. Schultz, Jacob Mincer, and myself. Schultz's most influential piece among many on human capital is his presidential address to the American Economic Association (Schultz, 1961). Mincer's pioneering study was his dissertation published in the Journal of Political Economy in 1958 (Mincer, 1958). He followed that up sixteen years later with his classic book Schooling, Experience, and Earnings (Mincer, 1974). Becker's most famous human capital studies are the various editions of his book Human Capital (Becker, 1964, 1975, 1993).
I do not use the word ‘revolution’ casually because the emphasis on investments in education, training, and other human capital radically changed the way economists and others interpreted many important economic, social, and policy issues. In this Foreword I discuss three of the most important fields affected by the human capital approach: the analysis of labor markets, explanations of the determinants of economic growth, and evaluations of the benefits from improved health and of the determinants of longer life and a better quality of life. I take each up in turn.
When I started my NBER research on human capital in 1957, my goals were modest. I had noticed from my study of discrimination against minorities in American labor markets that earnings of both white and black males rose significantly with their years of schooling. The main goal of my human capital study was to calculate rates of return on investments in education for different groups, after costs of education were netted out of the earnings benefits.
As my research progressed I began to realize that the human capital approach provided an entirely new way of looking at labor markets. Instead of assuming that differences in earnings mainly reflected whether workers held ‘good’ or ‘bad’ jobs, the human capital approach assumed that earnings mainly measure how much workers had invested in their skills and knowledge. According to this view, earnings would rise with the amount invested in education and training. On this interpretation, good jobs are mainly jobs held by workers who have invested a lot in their human capital.
This approach provided a broad range of implications about workers, including determinants of layoffs and quits, inequality in earnings, the effect of job experience on earnings—the so-called age–experience–earnings profiles—and on many other important characteristics of labor markets. Most importantly, the theory rather (p. xiv) directly leads to methods that link implications of the theory to empirical evidence through earnings regressions, and in many other directions.
For example, Becker and Chiswick (1966) ran the first empirical regressions that related log of earnings to years of schooling for different age groups. They showed, ‘under various simplifying assumptions’, that the coefficient on years of schooling would equal the rate of return on investment in education. (Mincer, 1958, makes the unrealistic assumption that the present value of earnings is the same for all schooling groups when future earnings are discounted by the market interest rate.) However, Mincer (1974) made the major extension of the Becker–Chiswick approach by adding years of job experience to the right-hand side regressors, where job experience was measured by age minus years of schooling minus six years. This greatly improved the fit of log wage earnings regression, although it did not much change the coefficient on years of schooling.
Prior to Schultz's work on human capital, the emphasis in the economic development literature was on the accumulation of physical capital, as in the basic neo-classical growth model. Schultz helped shift some of the attention to investments in skills and knowledge because he demonstrated in various ways that these seemed crucial to economic development. He even argued that investment in human capital was more important than investment in physical capital (see Schultz, 1960). Many subsequent empirical and theoretical studies have built on Schultz's analysis, such as empirical studies of the factors behind economic growth (see for example, Mankiew et al., 1992), and incorporations of human capital accumulation into models of economic growth (see for example, Lucas, 1988).
Health as human capital received its major push from the pioneering doctoral dissertation by Michael Grossman (see Grossman, 1972, for an article based on his dissertation). Grossman interpreted both the growth and decline of the quality and quantity of life as due to investments and disinvestments in human capital that improved health. Death occurred when health human capital fell below a certain level.
A related literature on human capital and health emphasizes the statistical value of life. This literature refers to how much individuals are willing to pay to increase their probability of surviving different ages (see for example, Rosen, 1988). A recent and important paper in that tradition (Murphy and Topel, 2003) estimates how much the population of the United States would be willing to pay for various reductions in the probabilities of dying from cancer, heart diseases, and other major ailments. They estimate that Americans would be willing to pay in the many trillions of dollars for even moderate reductions in these probabilities. I bring various strands of this literature together, and I also estimate the human capital cost of a major worldwide flu pandemic, in my Hicks lecture ‘Health as Human Capital’ (2007).
In the first several decades, human capital analysis was mainly concentrated at two universities: Chicago and Columbia. Since then it has spread to most universities and think tanks in the world, into other fields, such as sociology and political science, and (p. xv) among politicians and public officials. Politicians feel insecure unless they frequently mention the importance of investing in the human capital of their constituents. I certainly had not anticipated anything close to the eventual impact of the early research on investing in education, training, and other forms of human capital.
Human capital has remained a vital area of research for half a century because it has turned out to be so relevant in many different aspects of life. The research agenda has grown and expanded ‘in my judgment’ because, from the very early research on human capital, a close dialog developed between theory and empirical analysis. New theoretical developments generally stressed their empirical implications, and many of these implications have been tested with empirical and experimental data. Similarly, new empirical results have usually led to further theoretical insights, as in research that relates new empirical measures of the education levels of a labor force to issues like economic development, and studies of why women in richer countries are now considerably more likely than men to receive university degrees. Fields tend to become sterile when theorists refer mainly to the work of other theorists, with little attention to the empirical side, and when empiricists proceed with little concern for how their results relate to different theories.
The twenty-first century is clearly placing much greater emphasis than ever before on the importance of knowledge and information to the development of both countries and individuals. For example, the Internet provides access to a breadth of information that was unthinkable prior to its development, and growing knowledge of the role of different genes in affecting propensities to be vulnerable to different diseases makes personalized medicine a possibility rather than a pipedream. This means that it is more important than ever for both individuals and for nations to acquire knowledge, skills, and the experience to know how to acquire additional information. To me, this is the main explanation for the worldwide boom in higher education not only in the rich countries but also in developing and quite poor nations.
Therefore, I am optimistic that the vitality of human capital research will continue, and that its scope will expand further beyond the original emphasis on earnings into the effects of early childhood on the capacity to benefit from investments in human capital, the role of human capital in the sorting of men and women into different marriages, household production, and consumption decisions, such as habits and addictions, organizational structure, voting and political decisions, volunteer and other social activities, and other aspects of human behavior.
The chapters in the present volume provide an excellent example of the vibrant research that is currently taking place on human capital. These chapters discuss interactions between human capital and social capital, various links between human capital, entrepreneurship, and the theory of the firm, matching human capital of different individuals to different organizations, the growing role of human capital as globalization increases, and many other exciting topics. Readers should greatly benefit from studying and reflecting on the chapters that follow.