Gary S. Becker

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research
Volume Title: Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, 2nd
ed.
Volume Author/Editor: Gary S. Becker
Volume Publisher: NBER
Volume ISBN: 0-226-04109-3
Volume URL: http://www.nber.org/books/beck75-1
Publication Date: 1975
Chapter Title: Summary and Conclusions
Chapter Author: Gary S. Becker
Chapter URL: http://www.nber.org/chapters/c3739
Chapter pages in book: (p. 231 - 237)CHAPTER VIII
Summary and Conclusions
1. Summary
Most investments in human capital—such as formal education, on-the-
job training, or migration—raise observed earnings at older ages,
because returns are part of earnings then, and lower them at younger
ages, because costs are deducted from earnings at that time. Since
these common effects are produced by very different kinds of invest-
ment in human capital, a basis is pr9vided for a unified and compre-
hensive theory. The analysis in Part One starts with a discussion of
specific kinds of human capital, with the most attention paid to
on-the-job training, because the latter clearly illustrates and empha-
sizes the common effects. This leads to a general theory applying to
any kind of human capital.
The general theory has a wide variety of important applications.
It helps to explain such diverse phenomena as interpersonal and
interarea differences in earnings, the shape of age-earnings profiles—the
relation between age and earnings—and the effect of specialization on
skill. For example, because observed earnings are gross of the return
on human capital, some persons earn more than others simply be-
cause they invest more in themselves. Because "abler" persons tend to
invest more than others, the distribution of earnings would be very
U232 SUMMARY AND CONCLUSIONS
unequal and skewed even if "ability" were symmetrically and not too
unequally distributed. Further, the conventional practice of adding
returns to and subtracting costs from earnings serves to steepen age-
earnings profiles and to increase their concavity as investment in
human capital increases. Still another example, learning on and off
the job has the same kind of effects on observed earnings as formal
education, training, and other recognized investments in human capi-
tal, and can be considered one way to invest in human capital. Because
all such activities have similar effects on earnings, the total amount in-
vested in human capital and rates of return on this investment can,
on certain reasonable assumptions, be estimated from information on
observed earnings alone.
Some investments in human capital do not affect earnings because
costs are paid and returns are collected not by the persons involved
but by the firms, industries, or countries employing them. These in-
vestments, which are called "specific" investments, range from hiring
costs to executive training and are of considerable importance. They
help to explain the well-known fact that unemployment is greater
among unskilled than skilled workers in the United States, for more
specific capital is invested in the latter and employers have special
incentive to continue them on the payroll. Similarly, incompletely
vested pension plans may be used because they help to insure firms
against a loss on their specific investment. The analysis further sug-
gests that this type of investment is relatively more important in
monopsonistic than in competitive firms.
Part Two investigates empirically the effect of one kind of human
capital—formal education—on earnings and productivity in the United
States. The basic technique used is to adjust data on the earnings or
incomes of persons with different amounts of education for other
relevant differences between them. Chapter IV determines the relation
in recent years between earnings and college education, considering,
among other things, college costs and the greater "ability" of college
persons. The rate of return to an average college entrant is con-
siderable, of the order of 10 or 12 per cent per annum; the rate is
higher to urban, white, male college graduates and lower to college
dropouts, nonwhites, women, and rural persons. Differences in the
relative number of, say, white and nonwhite or urban and rural high-
school graduates who go to college are consistent with the differences
in their rates of return.
General observation indicates that college graduates tend to be
more "able" than high-school graduates, apart from the effect of
college education. This is indicated also by information gathered onSUMMARY
IQ, rank in class, father's education or income, physical health, ability
to communicate, and several other distinguishing characteristics. A
few studies permit some assessment of the relative importance of
ability and education in explaining earning differentials between col-
lege and high-school persons. By and large, it appears, ability explains
only a relatively small part of the differentials and college education
explains the larger part. Apparently, moreover, the rate of return
from college is positively related to the level of ability since there is
evidence that ability plays a larger part in determining the earnings
of college than high-school persons.
Gains from college education vary not only between groups, like
men and women, but also substantially within given groups. Indeed,
some calculations in Chapter IV indicate that the dispersion of rates
of return among white male college graduates is as large as, and per-
haps larger than, the very considerable dispersion in the returns per
dollar of capital among smaller corporate manufacturing firms. A
large dispersion makes it difficult for any individual to anticipate his
gain from education, a difficult)' that is compounded by a payoff
period of some twenty to twenty-five years. This long payoff period
provides an economic justification for flexible or "liberal" education
since most of the benefits would be received when the economic
environment was greatly different from that prevailing at the time of
entry into the labor force.
In Chapter V attention is focused on the social gain from college
education as measured by its effects on national productivity. The
major difficulty here, one that plagues economists, is in meas-
uring the benefits and costs to society that are not captured or borne
by college-educated persons. All that could be done was to derive—on
the basis of crude information—lower and what is best labeled "pos-
sible" upper limits to the social rates of return, limits that unfortu-
nately are wide apart. The more reliable lower limits thus derived
do not differ much from the private rates of return, but the upper
levels are almost double the latter. In the same chapter it is shown that
private rates of return on college education exceed those on business
capital. The evidence is insufficient to decide whether this, or the
converse, is true of the social rates.
Chapter VI estimates private rates of return from high-school edu-
cation. Before adjusting for differential ability, these private rates
from high school turn out to be greater than those from college. But
the "true" rates, after adjustment for ability, may not be, for ability
apparently differs more between high-school and elementary-school
students than between college and high-school students. A similar234 SUMMARY AND CONCLUSIONS
qualification applies to the crude evidence indicating that rates on
elementary.school education are the highest of all.
A traditional view among economists—certainly the dominant one
when I was a graduate student—is that changes in educational
ments have been largely autonomous, and that the secular increase in
education has caused a decline in earning differentials and rates of
return on education. Such evidence as there is, presented in Chapter
VI, suggests indeed that the relative position of high-school and col-
lege graduates probably declined during the first forty years of the
century under the impact of increases in their numbers. But the evi-
dence is scattered and much less reliable than the information avail-
able for the past thirty years. The latter, presented in the same
chapter, indicates that the rapid growth in the number of high.school
and college graduates has not reduced their economic position. An
alternative view, supported by this evidence, has therefore gained
many adherents in recent years; namely, that educational attainments
in good part adjust to, as well as influence, the demands of the eco-
nomic system.
Chapter VII shows that investment in education in fact steepens
and increases the concavity of age-earnings profiles, as predicted by the
theory in Part One. Partly as an aside, the discussion also includes a
critical examination of the common belief that earnings tend to turn
down when persons reach their late forties or fifties;this belief is
shown to be founded on an illusion, for it is based on data that do
not take economic progress into account. The same chapter shows that
the steepness of age-wealth profiles—the relation between age and
the discounted value of subsequent earnings—is also increased by in-
vestment in education and other human capital. It is suggested that
the apparent large secular increase in the peak wealth age in the
United States resulted from a secular increase in the amount invested
in such capital. The chapter concludes with some applications of these
profiles, especially to life-cycle changes in savings, indebtedness, and
consumption.
2. Future Research
I have no illusions that this study has more than scratched the surface
of the research required on the economic effects of education and other
investments in human capital. There is need for additional research
on manyifferent aspects of the gain from education and on otherFUTURE RESEARCH 285
implications of the theoretical analysis in Part One. A few examples
of possible research will be briefly mentioned.
Economists have been surprisingly ignorant of the quantitative
effects of different kinds of ability on earnings and productivity, yet
such knowledge is essential in estimating the gains from investment
in human capital (and in resolving many other problems as well). The
surveys utilized in this study show the feasibility and importance of
determining these effects, and many more such attempts should be
made in the future.
Only a limited amount could be said about the social gains from
education because of ignorance-about the external effects. This igno-
rance is closely connected with ignorance about the "residual" in calcu-
lations of the contribution of various factors to growth. Little progress
can be achieved, therefore, in improving the estimation of these social
gains until methods are discovered for reducing the residual.
To many underdeveloped countries the gains from education in the
United States fifty years ago may be more relevant than the gains
today because this country was much poorer then and many fewer
persons were educated. The evidence available indicates a decline in
the private gain from high-school and college education in the first
forty years of the century, but a much more intensive study is required
because this evidence is not very reliable. Fortunately, Albert Fishlow
has already published a study of historical changes in the demand for
and supply of educated persons in the United States, which throws con-
siderably more light on trends in the gains from education.1
I have not tried to estimate gains to persons taking specialized pro-
grams in high school and college. Some literature is already available
on the gains to various professionals, such as doctors, lawyers, engi-
neers, or scientists,2 and additional comparisons can and should be
made between persons with B.A., M.A., or Ph.D. degrees, liberal arts
or more specialized college majors, commercial or academic high-
school programs, and so on. My estimates of the average gains to
high-school and college persons would be useful as a yardstick to
determine when gains were unusually large or small; for example, since
1A.Fishlow, "Levels of Nineteenth.Century American Investment in Education,"
Journal of Economic History, 26, December 1966,pp.418—436;and "The American
Common School Revival: Fact or Fallacy?" in H. Rosovsky, ed., Industrialization in
Two Systems: Essays in Honor of Alexander Gerschenkron, New York, 1956.
2 See, for example, M. Friedman and S. Kuznets, Income from Independent Profes-
sional Practice, New York, NBER, 1945; C. J. Stigler and D. Blank, The Demand and
Supply of Scientific Personnel, New York, NEER, 1957; or W. L. Hansen, "The
'Shortage' of Engineers," Review of Economics and Statistics, August 1961.236 SUMMARY AND CONCLUSIONS
average gains are large, the gains from particular specialties would
have to be very large before they could be considered "excessive."
There has been persistent interest, if little success, in measuring
the differences in quality among high schools and colleges. One way
to measure quality within an economic context is to relate expendi-
tures on students and other variables in different schools tothe
(ability-adjusted) incomes of their graduates.4 Such studies have already
been undertaken on a small sample basis,5 and, with sufficient per-
sistence, additional information could be collected to expand the
samples considerably.
Chapter VII presents empirical work dealing with other implica-
tions of the theory outlined in Part One, such as the shape of age-
earnings and age-wealth profiles, differential unemployment, turnover
of military personnel, differential pay of school teachers, and esti-
mates of the amount invested in human capital. The theory is so
rich in implications that many more could be investigated, and em-
pirical work has already begun relating human capital to the turnover
in employment of women, comparative advantage and United States
exports, the elasticity of substitution between labor and physical
capital, and several other problems.
Probably the most important application is to differences in incomes
between regions and countries, either over time or cross-sectionally at
a moment in time. The estimates presented here of the gains from
education could be used to improve Denison's estimates of the con-
tribution of education to economic growth in the United States. The
major improvement, however, must await additional work on the
external effects of education, work that, I fear, will be rather slow in
coming.
A more immediate, and also important, application is to the per-
sonal distribution of incomes. This field has been afflicted with nu-
3Thisyardstick has been applied by H. G. Lewis to the medical profession with
extremely interesting and surprising results: the rate of return to doctors (on their
additional training compared to dentists) has apparently been no higher and perhaps
lower than that to all college graduates. See his Unionism and Relative Wages in the
United States: An Empirical Inquiry, Chicago, 1963.
4Anotherapproach is from the cost side, and relates differences in expenditures to
differences in curriculum, size, teaching staff, and other "real" inputs; in technical
language, this approach in effect constructs "hedonic" cost indexes. An interesting
initial study along these lines has been made by R. Calkins, "The Unit Costs of
Programs in Higher Education," unpublished Ph.D. dissertation, Columbia Uni-
versity, 1963.
See, e.g., the study by S. Hunt discussed in Chapter IV, Determinants
for College Graduates and the Return to Educational Investments," Ph.D. disserta-
tion, Yale University, 1963.CONCLUDING COMMENTS 237
merous theories that scarcely go beyond the skewness in the overall
distribution of incomes although substantial empirical material on
the anatomy of income distribution has been accumulated. The theory
developed in section 3 of Chapter III combines the effects of invest-
ment in human capital and differential ability, and, unlike other
theories, contains many implications about income distribution. The
empirical work of Mincer, referred to earlier, as well as the fact that
at least three-fifths of earnings are attributable either to investment
in human capital or to differential ability,6 is suggestive of the promise
offered by this approach. I hope to present further work along these
lines in the not too distant future.
3. Concluding Comments
In recent years the outpouring of work on education and other types
of human capital has reached such a level that some persons have
scornfully rejected it as simply another fad, while others have been
repelled by a few reckless applications and by its use to justify all
kinds of public policies. To those who believe in the great value of
the concept, the excesses have been most unfortunate, although per.
haps unavoidable. Probably no important development has ever sailed
smoothly into the mainstream of economic thought.
One might, nevertheless, get discouraged were it not for the fact
that peoples of the world differ enormously in productivity, that these
differences are in turn largely related to environmental factors, and
that the latter are in turn related to the accumulation of knowledge
and the maintenance of health. The concept of, investment in human
capital simply organizes and stresses these basic truths. Perhaps they
are obvious, but obvious truths can be extremely important. Indeed,
I would venture the judgment that human capital is going to be an
important part of the thinking about development, income distribu-
tion, labor turnover, and many other problems for a long time to come.
6 Estimated by taking one minus the ratio of the average earnings of persons with
no education to the average earnings of alt persons.

Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, 2nd ed.

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics