Gary S. Becker - Human Capital_ A Theoretical and Empirical Analysis, with Special Reference to Educ - GARY S BECKER Winner of the Nobel Prize in

Gary S. Becker - Human Capital_ A Theoretical and Empirical Analysis, with Special Reference to Educ

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Unformatted text preview: GARY S. BECKER Winner of the Nobel Prize in Economics HUMAN CAPITAL A Theoretical and Empirical Analysis with Special Reference to Education T H I R D E D I T I O N Human Capital [ Gary S. Becker Human Capita A Theoretical and Empirical Analysis, with Special Reference to Education Third Edition The University of Chicago Press v£j\ Chicago and London Gary S. Becker is University Professor of Economics and Sociology at the University of Chicago and winner of the 1992 Nobel Memorial Prize in Economic Science This book is published by arrangement with the National Bureau of Economic Research The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London © 1964, 1975, 1993 by The National Bureau of Economic Research All rights reserved. Published 1993 Printed in the United States of America 02 01 00 99 98 97 96 95 94 93 1 2 3 4 5 ISBN: 0-226-04119-0 (cloth) 0-226-04120-4 (paper) Library of Congress Cataloging in Publication Data Becker, Gary Stanley, 1930Human Capital : a theoretical and empirical analysis, with special reference to education / Gary S. Becker.—3rd ed. p. cm. Includes index. 1. Education—Economic aspects—United States. 2. Manpower policy—United States. 3. Human capital—United States. I. Title. LC66.B4 1993 331.11'423—dc20 93-24690 CIP ©The Paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984. National Bureau of Economic Research Officers George T. Conklin,Jr., chairman Paul W. McCracken, vice chairman Martin Feldstein, president and chief executive officer Geoffrey Carliner, executive director Charles A. Walworth, treasurer Sam Parker, director offinanceand administration Directors at Large John H. Biggs Andrew Brimmer Carl F. Christ George T. Conklin, Jr. Don R. Conlan Kathleen B. Cooper Jean A. Crockett George C. Eads Martin Feldstein George Hatsopoulos Lawrence R. Klein Franklin A. Lindsay Paul W. McCracken Leo Melamed Robert T. Parry Peter G. Peterson Robert V. Roosa Richard N. Rosett Bert Seidman Eli Shapiro Donald S. Wasserman Directors by University Appointment Jagdish Bhagwati, Columbia William C. Brainard, Yale Glen G. Cain, Wisconsin Franklin Fisher, Massachusetts Institute of Technology Saul H. Hymans, Michigan Marjorie B. McElroy, Duke James L. Pierce, California, Berkeley Andrew Postlewaite, Pennsylvania Nathan Rosenberg, Stanford Harold T. Shapiro, Princeton Craig Swan, Minnesota Michael Yoshino, Harvard Arnold Zellner, Chicago Directors by Appointment of Other Organizations Marcel Boyer, Canadian Economics Association Rueben C. Buse, American Agricultural Economics Association Richard A. Easterlin, Economic History Association Gail Fosler, The Conference Board A Ronald Gallant, American Statistical Association Robert S. Hamada, American Finance Association Charles Lave, American Economic Association Rudolph A. Oswald, American Federation of Labor and Congress of Industrial Organizations Dean P. Phypers, Committee for Economic Development James F. Smith, National Association of Business Economics Charles A. Walworth, American Institute of Certified Public Accountants Directors Emerti Moses Abramovitz Emilio G. Collado Thomas D. Flynn Gottfried Haberler Geoffrey H. Moore James J. O'Leary George B. Roberts William S. Vickrey Relation of the Directors to the Work and Publication of the National Bureau of Economic Research 1. The object of the National Bureau of Economic Research is to ascertain and to present to the public important economic facts and their interpretation in a scientific and impartial manner. The Board of Directors is charged with the responsibility of ensuring that the work of the National Bureau is carried on in strict conformity with this object. 2. The President of the National Bureau shall submit to the Board of Directors, or to its Executive Committee, for their formal adoption all specific proposals for research to be instituted. 3. No research report shall be published by the National Bureau until the President has sent each member of the Board a notice that a manuscript is recommended for publication and that in the President's opinion it is suitable for publication in accordance with the principles of the National Bureau. Such notification will include an abstract or summary of the manuscript's content and a response form for use by those Directors who desire a copy of the manuscript for review. Each manuscript shall contain a summary drawing attention to the nature and treatment of the problem studied, the character of the data and their utilization in the report, and the main conclusions reached. 4. For each manuscript so submitted, a special committee of the Directors (including Directors Emeriti) shall be appointed by majority agreement of the President and Vice; Presidents (or by the Executive Committee in case of inability to decide on the part of the President and Vice Presidents), consisting of three Directors selected as nearly as may be one from each general division of the Board. The names of the special manuscript committee shall be stated to each Director when notice of the proposed publication is submitted to him. It shall be the duty of each member of the special committee to read the manuscript. If each member of the manuscript committee signifies his approval within thirty days of the transmittal of the manuscript, the report may be published. If at the end of that period any member of the manuscript committee withholds his approval, the President shall then notify each member of the Board, requesting approval or disaproval of publication, and thirty days additional shall be granted for this purpose. The manuscript shall then not be published unless at least a majority of the entire Board who shall have voted on the proposal within the time fixed or the receipt of votes shall have approved. 5. No manuscript may be published, though approved by each member of the special manuscript committee, until forty-five days have elapsed from the transmittal of the repori: in manuscript form. The interval is allowed for the receipt of any memorandum of dissent or reservation, together with a brief statement of his reasons, that any member may wish to express; and such memorandum of dissent or reservation shall be published with the manuscript if he so desires. Publication does not, however, imply that each member of the Board has read the manuscript, or that either members of the Board in general or the special committee have passed on its validity in every detail. 6. Publications of the National Bureau issued for informational purposes concerning; the work of the Bureau and its staff, or issued to inform the public of activities of Bureau staff, and volumes issued as a result of various conferences involving the National Bureau shall contain a specific disclaimer noting that such publication has not passed through the normal review procedures required in this resolution. The Executive Committee of the Board is charged with review of all such publications from time to time to ensure that the) do not take on the character of formal research reports of the National Bureau, requiring formal Board approval. 7. Unless otherwise determined by the Board or exempted by the terms of paragraph 6, a copy of this resolution shall be printed in each National Bureau publication. (Resolution adopted October 25, 1926, as revised through September 30, 1974) To students and colleagues at the University of Chicago and at Columbia University who contributed so much to my human capital. vn Contents List of Tables List of Charts Preface to the Third Edition Preface to the First Edition I. INTRODUCTION TO THE SECOND EDITION INTRODUCTION TO THE FIRST EDITION II. xiii xvii xix xxi 3 11 HUMAN CAPITAL REVISITED 15 1. 2. 3. 4. 5. 6. 15 17 21 23 25 25 Introduction Education and Training Human Capital and the Family Human Capital and Economic Development Conclusions References Part One: Theoretical Analysis III. IV. INVESTMENT IN HUMAN CAPITAL: EFFECTS ON EARNINGS 29 1. On-the-Job Training General Training Specific Training 2. Schooling 3. Other Knowledge 4. Productive Wage Increases 30 33 40 51 53 54 INVESTMENT IN HUMAN CAPITAL: RATES OF RETURN 59 1. Relation between Earnings, Costs, and Rates of Return Addendum: The Allocation of Time and Goods over Time 2. The Incentive to Invest Number of Periods Wage Differentials and Secular Changes 59 70 85 85 89 IX CONTENTS Risk and Liquidity Capital Markets and Knowledge Some Effects of Human Capital Examples Ability and the Distribution of Earnings Addendum: Education and the Distribution of Earnings: A Statistical Formulation Addendum: Human Capital and the Personal Distribution of Income: An Analytical Approach Supplement: Estimating the Effect ofFamily Background on Earnings 91 92 95 95 97 102 108 131 Part Two: Empirical Analysis V. RATES OF RETURN FROM COLLEGE EDUCATION 1. Money Rates of Return to White Male College Graduates Returns in 1939 Costs in 1939 Rates of Return in 1939 Rates of Return in 1949 2. Some Conceptual Difficulties Correlation between "Ability" and Education Correlation between Education and Other Human Capital 3. Rates of Return to Other College Persons College Dropouts Nonwhites Women Rural Persons 4. Variation in Rates of Return VI. UNDERINVESTMENT IN COLLEGE EDUCATION? 1. Private Money Gains 2. Social Productivity Gains 3. Private Real Rates VII. 161 162 162 166 168 169 171 171 181 183 183 186 192 194 195 205 205 208 212 RATES OF RETURN FROM HIGH SCHOOL EDUCATION AND TRENDS OVER TIME 1. The Rate of Return from High School Education 2. Trends in Rates of Return After 1939 Before 1939 215 215 219 219 223 CONTENTS VIII. AGE, EARNINGS, WEALTH, AND HUMAN CAPITAL 1. Age-Earnings Profiles 2. Age-Wealth Profiles LX. SUMMARY AND CONCLUSIONS 1. Summary 2. Future Research 3. Concluding Comments xi 228 230 237 245 245 248 251 Part Three: Economy-Wide Changes INTRODUCTION X. HUMAN CAPITAL AND THE RISE AND FALL OF FAMILIES, BY GARY S. BECKER AND NIGEL TOMES 1. Introduction 2. Earnings and Human Capital Perfect Capital Markets Imperfect Access to Capital 3. Assets and Consumption 4. Fertility and Marriage 5. Empirical Studies 6. Summary and Discussion References XI. 257 257 260 260 266 274 280 282 290 294 THE DIVISION OF LABOR, COORDINATION COSTS, AND KNOWLEDGE, BY GARY S. BECKER AND KEVIN M. MURPHY 1. 2. 3. 4. 5. 6. 7. Introduction Division of Labor among Tasks Coordination Costs Knowledge and Specialization Extent of the Market The Growth in Specialization and Knowledge The Division of Labor between Sectors: Teachers and Workers 8. Summary Appendix References XII. 255 299 299 300 304 306 309 311 314 318 319 320 HUMAN CAPITAL, FERTILITY, AND ECONOMIC GROWTH, BY GARY S. BECKER, KEVIN M. MURPHY, AND ROBERT TAMURA 1. Introduction 2. Basic Properties of the Model 3. Fertility and Growth 323 323 325 331 Xll CONTENTS 4. Comparative Advantage in the Production of Human Capital 5. Discussion 6. Concluding Remarks References 337 344 347 348 APPENDIXES A. SOURCES AND METHODS 1. Incomes a. The Basic Data b. Under- and Overreporting c. Unemployment d. Coverage in 1939 e. Taxes / Urban-Rural Distribution g. Hours of Work 2. Costs a. Earnings of Students b. Direct Private Costs c. Direct Social Costs B. 351 351 351 354 355 357 358 360 360 361 361 364 367 MATHEMATICAL DISCUSSION OF RELATION BETWEEN AGE, EARNINGS, AND WEALTH 370 AUTHOR INDEX 377 SUBJECT INDEX 381 Tables 1. Results of Regressing Natural Log of Earnings on Education for 1959 Earnings of White Males Aged 25 to 64 in the South and Non-South 106 2. Actual Earning Differentials between Urban, Native White, Male College and High School Graduates in 1939 at Various Ages 164 3. Alternative Estimates of Rates of Return to 1939 Cohort of Native White Male College Graduates 169 4. Earning Differentials between White Male College and High School Graduates in 1949 at Various Ages 170 5. Several Measures of Ability at Different Educational Levels 172 6. Median Salaries of Illinois, Minnesota, and Rochester Men, by Rank in High School Graduating Class and by Intelligence Test Score 176 7. Average and Marginal Market Discrimination against Nonwhites for Various Age and Education Classes, by Region, 1939 189 8. Family Incomes of Married Men and Women in 1960, by Education and Years after First Job 194 9. Coefficients of Variation in After-Tax Income of White Males, by Age and Years of Education, 1939 and 1949 196 10. Coefficients of Variation in Mortality and Cohort Incomes for College and High School Graduates, by Age, 1939 and 1949 198 11. Coefficients of Variation in the Returns to College Graduates, by Age, 1939 and 1949 202 12. Investment in College Education Relative to Physical Capital for Selected Years 213 13. Average I. Q. at Several Educational Levels 216 Xlll XIV TABLES 14. Investment in High School Education, College Education, and Physical Capital, 1900-1956 218 15. Private Rates of Return from College and High School Education for Selected Years since 1939 220 16. Percentage of Population with High School and College Education in 1940, 1950, and 1957 222 17. Income Differentials between College and High School Graduates at Various Ages and for Scattered Years since 1904 224 18. Income Differentials between High School and Elementary School Graduates at Various Ages and for Scattered Years since 1900 in Current and 1958 Dollars 225 19. Net After-Tax Incomes of White Males in 1939 and 1949, by Age and Years of Education 230 20. Estimated Incomes of Cohorts at Different Educational Levels 234 21. Annual Rates of Income Change between Successive Age Classes for 1939 Cohorts at Different Educational Levels 236 22. Regressions of Son's Income or Earnings on Father's Income or Earnings in Linear, Semilog, and Log-linear Form 284 23. Regressions of Son's Wealth on Father's and Grandfather's Wealth 288 A-l. Open-End Means Used in Calculating 1949 Incomes 352 A-2. Three Estimates of Before-Tax Income Differentials between Education Classes in 1949 353 A-3. Fraction of White Males Reporting No Income in 1949, by Age and Education Class 354 A-4. Comparison of Incomes Reported by Census and Commerce for 1946 and 1954 355 A-5. Adjustment for Unemployment in 1939, by Education Class 356 A-6. Average Earnings of Census College Graduates and Independent Doctors, Dentists, and Lawyers in 1939 358 A-7. Fraction of Native Whites and Urban Whites Included in 1939 Data, by Age and Education 359 A-8. Distribution of Persons of Different Educational Levels, by Size of Place of Residence, 1939 360 TABLES XV A-9. Average Hours Worked in 1939, by Educational Level 361 A-10. Alternative Estimates of Fraction of Earnings of High School Graduates of Same Age Received by College Students 362 A-ll. Alternative Estimates of Earnings of Persons Aged 14-17 with Eight Years of Schooling, 1949 364 A-12. Alternative Estimates of Fraction of Earnings of Elementary School Graduates of the Same Age Received by High School Students 365 Charts 1. Relation of Earnings to Age 37 2. Relations between Age, Wage Rates, and Commodity Consumption 75 3. Relations between Age, Wage Rates, and Time Spent in Consumption 76 4. Supply and Demand Curves for Investment in Human Capital 112 5. Equilibrium Levels of Investment in Human Capital Resulting from Differences in "Opportunities" 122 6. Equilibrium Levels of Investment in Human Capital Resulting from Differences in "Abilities" 126 7. Equilibrium Levels of Investment in Human Capital Resulting from Differences in "Abilities" and "Opportunities" 130 8. The Effect of Background and Ability on Earnings and the Accumulation of Human Capital 133 9. The Effect of a Compulsory Investment Law on the Amount Invested 141 10. "Time Series" Age-Earnings Profiles for Several Education Cohorts 233 11. Age-Wealth Profiles of 1939 Graduates 238 12. Rates of return on parental expenditures on children 264 13. Parental expenditures on children, with capital constraints 268 14. [untitled] 328 15. [untitled] 329 16. [untitled] 342 17. [untitled] 343 xvn Preface to the Third Edition In the recent presidential campaign, both President Clinton and former President Bush emphasized the importance of improving the education and skills of American workers. They did not even shy away from using the term "investing in human capital" to describe the process of improving the quality of the labor force. A dozen years ago, this terminology would have been inconceivable in a presidential campaign. The President has proposed to implement his campaign pledge by spending more on investments in college education and on-the-job training. The interest shown in human capital, not only in the academic literature but also in discussions of public policy, and the continuing attention paid to the second edition of this book, encouraged me to prepare a third one. As in the transition from the first to the second edition, I have not changed anything in the previous editions. I have added four essays written since the second edition was published in 1975. One is the Ryerson Lecture at the University of Chicago in 1989 that revisits human capital and surveys the field in a nontechnical way. I recommend it especially for the noneconomists who want a brief statement of the contribution of human capital analysis to the understanding of economic and social behavior. The other three essays included in this edition are more technical, and cover applications of human capital analysis to the understanding of income inequality and economic growth. They form a new Part 3 at the end of the book. Obviously, I had no expectation when the first edition was published in 1964 that a third edition would be prepared thirty years later. I continue to be amazed by the way the human capital field has grown from being highly controversial to one that has gained acceptance not only in economics, but also in other disciplines and among the general public. This is a tribute to the foresight and influence of the pioneers in this field—especially T. W. Schultz, Milton Friedman, and Jacob Mincer— and to the fact that from the very beginning, the analysis of human capi- xix XX PREFACE TO THE THIRD EDITION tal combined theory with attention to major real-world problems and issues. I am indebted to Geoffrey Huck of the University of Chicago Press for encouragement that there would be a market for another edition, to Shirley Kessel for preparing the index for this edition, to Myrna Hieke, my secretary of many years, for help in putting the new materials together, and to Becky Kilburn for her usual excellent research assistance. I am especially indebted to colleagues and students at the University of Chicago for a friendly but critical atmosphere that does not allow anyone to live off of past laurels and accomplishments. I have never encountered a better environment for conducting research and for the development of new ideas to help explain the world we live in. Preface to the First Edition The origin of this study can be traced both to the finding that a substantial growth in income in the United States remains after the growth in physical capital and labor has been accounted for and to the emphasis of some economists on the importance of education in promoting economic development. My original intention was to shed some exploratory light on these issues by bringing together readily available information from Census reports on the incomes of persons with different amounts of education and from the Office of Education on the costs of education. For if education were economically important, I reasoned, money rates of return on education ought to be significant. A long time has elapsed between the start, back in 1957, and the appearance of this monograph presenting the full analysis. During that time interest in the economics of education has mushroomed throughout the world and stimulated a profusion of ...
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