Chapter 4
Human Capital Economics
4.1 Introduction
Historically, economists thought of investments in terms of land, labor, and capital. With the Industrial Revolution, financial capital became increasingly important as it was needed to procure capital equipment. With the more recent Information Revolution, highly skilled labor has become increasingly important. This has led to the emergence and growth of a field of economics termed human capital economics.
“Human capital refers to the stock of skills and knowledge embodied in the ability to perform labor so as to produce economic value. It is the skills and knowledge gained by a worker through education and experience” (Wikipedia, 2009). This chapter addresses the assessment of investments in creating skills and knowledge.
Gary Becker, a pioneer in human capital economics, has asserted that one can invest in human capital (through education, training, health care, etc.) and the returns depend on the rate of return on the human capital one owns (Becker, 1964). Human capital is a means of production and additional investment yields additional output. He argues the following:
- Firms are willing to invest in training workers to develop firm-specific skills that are productive at the current firm but not at other firms.
- Firms are unwilling to invest in general skills training because workers can simply move to new firms—consequently, workers must bear the costs of general skills training.
Card (1999) provided well-documented ...
