kitchen table math, the sequel: human capital & Two Million Minutes

Monday, July 21, 2008

human capital & Two Million Minutes

We watched Two Million Minutes last night. It was a lot of fun, although I don't think it works well as piece of political or persuasive filmmaking.

After we saw it, I discovered that one of the economists interviewed -- Richard Freeman -- published a book called The Overeducated American in 1976, the point at which income inequality was lowest in the country's history, which meant that the return to a college education was also the lowest in the country's history.

Gary Becker mentions the book in his essay on human capital:

To most people capital means a bank account, a hundred shares of IBM stock, assembly lines, or steel plants in the Chicago area. These are all forms of capital in the sense that they are assets that yield income and other useful outputs over long periods of time.

But these tangible forms of capital are not the only ones. Schooling, a computer training course, expenditures of medical care, and lectures on the virtues of punctuality and honesty also are capital. That is because they raise earnings, improve health, or add to a person's good habits over much of his lifetime. Therefore, economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.

Education and training are the most important investments in human capital. Many studies have shown that high school and college education in the United States greatly raise a person's income, even after netting out direct and indirect costs of schooling, and even after adjusting for the fact that people with more education tend to have higher IQs and better-educated and richer parents. Similar evidence is now available for many years from over a hundred countries with different cultures and economic systems. The earnings of more educated people are almost always well above average, although the gains are generally larger in less developed countries.

Consider the differences in average earnings between college and high school graduates in the United States during the past fifty years. Until the early sixties college graduates earned about 45 percent more than high school graduates. In the sixties this premium from college education shot up to almost 60 percent, but it fell back in the seventies to under 50 percent. The fall during the seventies led some economists and the media to worry about "overeducated Americans." Indeed, in 1976 Harvard economist Richard Freeman wrote a book titled The Overeducated American. This sharp fall in the return to investments in human capital put the concept of human capital itself into some disrepute. Among other things it caused doubt about whether education and training really do raise productivity or simply provide signals ("credentials") about talents and abilities.

But the monetary gains from a college education rose sharply again during the eighties, to the highest level in the past fifty years. Economists Kevin M. Murphy and Finis Welch have shown that the premium on getting a college education in the eighties was over 65 percent. Lawyers, accountants, engineers, and many other professionals experienced especially rapid advances in earnings. The earnings advantage of high school graduates over high school dropouts has also greatly increased. Talk about overeducated Americans has vanished, and it has been replaced by concern once more about whether the United States provides adequate quality and quantity of education and other training.

This concern is justified. Real wage rates of young high school dropouts have fallen by more than 25 percent since the early seventies, a truly remarkable decline. Whether because of school problems, family instability, or other factors, young people without a college or a full high school education are not being adequately prepared for work in modern economies.

[snip]

The enormous influence of the family would seem to imply a very close relation between the earnings, education, and occupations of parents and children. Therefore, it is rather surprising that the positive relation between the earnings of parents and children is not strong...

The old adage of "from shirtsleeves to shirtsleeves in three generations" is no myth; the earnings of grandsons and grandparents are hardly related. Apparently, the opportunities provided by a modern economy, along with extensive public support of education, enable the majority of those who come from lower-income backgrounds to do reasonably well in the labor market. The same opportunities that foster upward mobility for the poor create an equal amount of downward mobility for those higher up on the income ladder.

[snip]

New technological advances clearly are of little value to countries that have very few skilled workers who know how to use them. Economic growth closely depends on the synergies between new knowledge and human capital, which is why large increases in education and training have accompanied major advances in technological knowledge in all countries that have achieved significant economic growth.

The outstanding economic records of Japan, Taiwan, and other Asian economies in recent decades dramatically illustrate the importance of human capital to growth. Lacking natural resources—they import almost all their energy, for example—and facing discrimination against their exports by the West, these so-called Asian tigers grew rapidly by relying on a well-trained, educated, hardworking, and conscientious labor force that makes excellent use of modern technologies.



I hate to even think about people who listened to pundits back in the 70s saying a college education was a waste of time because college graduates didn't make any money. That viewpoint was everywhere.

You have to take advice about how it doesn't pay to go to Harvard with a grain of salt when it comes from people who went to Harvard.

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