EDUCATION AND DEVELOPMENT

L e c t u r e 5 P L G 5 1 5 5 O c t o b e r 2 0 1 5

Human Capital Theory

Pre-Lecture Debate

An increase in the number of college/university graduates is

beneficial for the socio-economic development of a country.

vsThe expansion of higher education

is detrimental to the socio-economic development of a

country.

Contents

1. The idea

2. The background

3. The theory

4. Education as investment in human capital

5. Individual returns of the investment in education

6. Criticism of the human capital theory

1. The idea

“There is such a thing as investment in human capital […]. So soon as this is recognised, the distinction between economy

in consumption and economy in investment becomes blurred.

[…] consumption is investment in personal productive capacity.

This is especially important in connection with children: to reduce unduly expenditure on their consumption may greatly lower their efficiency in after-life. Even for adults […] a check

to personal consumption is also a check to investment.”

– A. C. Pigou, 1928

2. The background

2. The background

Modernization: the process by which agrarian societies are transformed into industrial ones

Consequences of modernization to labor: The nature of labor has changed – people “work smarter” due

to Technological innovations A more efficient use of knowledge The role of knowledge has become more important A higher proportion of white collar jobs (Drucker)

Education has become necessary from being a luxury

2. The background

Consequences of modernization to labor: Women have entered the labor market due to

Unequal sex ratio – lack of males after the World Wars Changes in the types and structure of jobs Reduced fertility – or is this the result of female labor? Financial reasons – or is female labor a covert salary cut?

More working women > it is more difficult to find a job for the less educated (of both sexes)

3. The theory

3. The theory

Human beings seen as capital goods Related to the theories of Adam Smith and Karl Marx

Human beings need useful knowledge and skills for their subsistence

Knowledge and skills are a form of capitalDirect investment in education and health results in

economic developmentDevelopment of human capital

Improves the quality and productivity of the labor force Increases the competitiveness of national economies in the global market

4. Education as investment in human capital

4. Education as investment in human capital

Education Is a basic component of social, economic and

political development

Has an economic value

Contributes to economic growth (Adam Smith, 1776; Wheeler, 1980)

4. Education as investment in human capital

Investment in education Contributes to national economic growth (Marris,

1982)

Increases the income of the poor (Jamison and Lau, 1982)

Improves the productive skills and capacities of the national labor force (Denison, 1962; Schultz, 1961)

4. Education as investment in human capital

Investment in education Has a significantly higher return rate than

investment in physical capital > most of the economic growth comes from investment in education (Schultz, 1963)

Based on the above notions, the World Bank has provided loans for educational development since 1962

5. Individual returns of the investment in education

Education is an investment for the students and their families, too:

The qualification of the individual determines one’s labor opportunities and choice

High-prestige jobs usually require high qualification

In most societies, higher degree means higher income

5. Individual returns of the investment in education

Education is an investment for the students and their families, too: The income gap is not the same, however,

throughout the life cycle Age-earning profiles – an example from Thailand:

5. Individual returns of the investment in education

BUT…The ability problem

Highly educated individuals tend to have the ability, self-discipline and motivation to earn higher salaries

Higher degree and higher income may be result of the same individual abilities

5. Individual returns of the investment in education

BUT…Sometimes the returns are insufficient

Many skilled blue collar jobs offer high reward Expansion theory (Archer)

Deflation in value of college degree Percent of college graduates has increased substantially The progress of the disadvantaged offset by education inflation

It is not the knowledge and skills of humans but credentialism in the society what has increased Education is a channel of social reproduction (Bourdieu)

6. Criticism of the human capital theory

6. Criticism of human capital theory

Investment or consumption?It is not appropriate to regard expenditure

for education as an investment

6. Criticism of the human capital theory

Investment in human capital does not work automatically Discrepancy between labor demand and the skills of new

graduates The dominant value system and working culture of

education, health etc. employees may reduce or counter the impact of investment

It is the quality of education what really matters Test scores show many students lack functional abilities Investment does not guarantee better results

6. Criticism of the human capital theory

Sometimes the returns are insufficient Many skilled blue collar jobs offer high reward Educational expansion theory (Archer, 1982)

Deflation in value of college degrees Percent of college graduates has

increased substantially The progress of the disadvantaged

offset by educational inflation

It is not the knowledge and skills of humans but credentialism in the society what has increased Education is a channel of social reproduction (Bourdieu &

Passeron, 1990)

Everybody

Nobody

Statements for debate (Lecture 6)

Alternative education and home schooling are beneficial to the learners.

(deschooling, diploma disease, alternative education)

vs

Alternative education and home schooling are harmful to the learners.(alternative education, functionalist theory, human capital theory)