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Human capital

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People are not born with the same potential in­telligence or raw talent, but inherited differ­ences are magnified or offset by acquired skills. Sharpening productive talents or acquiring new skills is called investment inhuman capital. Human capital represents improvements made to the labor embodied in human beings.

Most of us spend years in school or in on-the-job training preparing ourselves to be more pro­ductive. Attention to our general health or migrating to find more suitable jobs also involves investment in human capital. Self-improvement fanatics may spend most of their lives acquiring human capital. We bring to our training or ed­ucation certain natural aptitudes and strengths. We invest in human capital in efforts to improve our abilities to perform certain tasks.

• Investment in Education. Investing in new physical capital requires sacrifices of potential current consumption so that higher future con­sumption can be realized. Acquiring skills through education entails similar sacrifices. The time and money you sacrifice to attend college are examples.

College is partially a consumption experi­ence for many students, offering football games, parties, and other social opportunities. Love of learning may also play a role, but most students perceive earning a degree as one step toward a higher income stream and access to "the good life." If you view your education primarily as an investment that should increase your future in­come, it is important to select your major care­fully because some majors may merely make you a scholarly short-order cook.

Investments in human capital involve bal­ancing higher lifetime earnings against the costs of acquiring valuable skills. As a college student, you must pay for tuition, books, and other out- of-pocket expenses, and less time is available for work. Moreover, your first job as a new gradu­ate may not yield the wage you might have earned had you moved directly from high school into the labor market and acquired four years of work experience. After a few years on the job, however, your income will probably exceed that of most high school graduates who entered the labor market directly.

Your own prosperity depends on returns from your human capital, but society as a whole shares in both the costs (through taxes) and ben­efits of much education and training. Education tends to make life more pleasant for everyone. For example, we all benefit from widespread lit­eracy. Can you imagine the gridlock if most dri­vers could not read traffic signs? We also gain by having well-educated voters. Finally, well-ed­ucated people generate higher incomes, pay more taxes, and commit relatively fewer crimes.

These sorts of positive externalities from educated people to society are effectively public goods, that is, col­lective benefits that justify some sharing of edu­cation costs through taxes. However, external gains to others decline as we become increas­ingly educated. Things learned in grade school make us semi-civilized. High school civilizes us even more, on average if not in every case. But more benefits derived from college are personal, either in the form of consumption now or higher income later.

Marginal productivity theory suggests that you will receive more income to the extent that a degree makes you more productive. The onset of diminishing returns, however, implies that more education eventually yields successively smaller additions to your lifetime income. These reflections are supported by the private rate of return estimates developed by numerous econ­omists over the last few years. Rates of return decline as individuals become more educated. For example, the personal rate of return from completing the last year of high school (9 through 11 to 12 years) is roughly 18% while the average return from a college degree is now around 15%.

One cautionary note: these returns reflect only private earnings and do not include social benefits and personal gratification from ex­tended education. For example, the public ben­efits from the works of Einstein, Keynes, or most Nobel Prize winners probably could not have been produced by people with only high school educations.

Formal education is one type of human cap­ital—it broadens both your horizons and your options, including job opportunities. It is also used as a device for the screening and signaling described below. Proficiency in some occupa­tions is enhanced little by schooling, however, but grows immensely with experience and on-the-job training. 3804 digits


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