Human Capital

Human capital is analogous to physical capital.  As with physical capital, the stock of one's human capital helps determine many aspects of a person’s life, most notably income. Investment in human capital can take many forms.  The most commonly cited are education and on-the-job training or experience.  Others include improving health care, staying physically fit, taking vitamins, following a healthy diet, learning about current events, learning how the job market works and countless others.  For the past 100 years, it has frequently been pointed out that the nation’s investment in and stock of human capital exceeds that for physical capital.

At any point in time, a person’s human capital is the primary determinant of his or her earnings level.  The stock of their human capital changes from year to year but does not change at a constant rate.  Consequently, the rate of change in their earnings also changes over time.
Although the concept of human capital can be traced back to the 17th century, a unified theory of human capital economics has been developed over the past fifty years.  Even forty years ago, real-world observations were being explained by labor economists familiar with the economics of human capital.  In 1964, Nobel Laureate, Professor Gary S. Becker of the University of Chicago summarized the state of the science at that time in his classic book, Human Capital:

It offers a unified explanation of a wide range of empirical phenomena which have either been given ad hoc interpretations or have baffled investigators.  Among these phenomena are the following: (1) Earnings typically increase with age at a decreasing rate.  Both the rate of increase and the rate of retardation tend to be positively related to the level of skill. (2) Unemployment rates tend to be inversely related to the level of skill. (3) Firms in underdeveloped countries appear to be more “paternalistic” toward employees than those in developed countries. (4) Younger persons change jobs more frequently than older persons do. (5) The distribution of earnings is positively skewed, especially among professional and other skilled workers. (6) Abler persons receive more education and other kinds of training than others. (7) The division of labor is limited by the extent of the market. (8) The typical investor in human capital is more impetuous and thus more likely to err than is the typical investor in tangible capital.