CHAPTER one particular

The Basic Theory of Individual Capital

1 . General Issues

One of the most crucial ideas in labor economics is to consider the group of marketable skills of employees as a kind of capital in which workers produce a variety of investments. This point of view is important understand both investment incentives, and the structure of wages and earnings.

Usually speaking, human being capital corresponds to any stock of knowledge or perhaps characteristics the worker provides (either inborn or acquired) that contributes to his or her " productivity”. This definition is definitely broad, which has equally advantages and disadvantages. The benefits are very clear: it means that we can00 think of not merely the years of schooling, yet also of any variety of other characteristics as part of human capital investments. For instance , school quality, training, behaviour towards job, etc . Using this type of reasoning, we are able to make some progress towards understanding a few of the differences in earnings across workers which are not accounted simply by schooling differences alone.

The disadvantages are also related. At some level, we can push this notion of human capital too far, and think of every single difference in remuneration we observe in the labor market as as a result of human capital. For example , basically am paid less than another Ph. M., that must be because I have reduce " skills” in some different dimension that's not being measured by my personal years of schooling–this is the popular (or infamous) unobserved heterogeneity issue. The presumption that all pay differences are linked to skills (even if learning these skills are unobserved to the those who claim to know the most about finance in the common data sets) is not just a bad place to begin when we want to can charge a conceptual structure about


Lectures in Labor Economics

empirical wage distributions, but there are many notable exclusions, some of which will be discussed afterwards. Here it really is useful to point out three: (1) Compensating differentials: a worker may be paid out less in money, as they is receiving a part of his payment in terms of other (hard-to-observe) qualities of the task, which may incorporate lower effort requirements, easier working circumstances, better facilities etc .

(2) Labor industry imperfections: two workers while using same human being capital may be paid different wages because jobs differ in terms of their very own productivity and pay, and one of them ended up coordinating with the excessive productivity task, while the other has coordinated with the low productivity one.

(3) Taste-based discrimination: business employers may pay a lower wage to a staff member because of the worker's gender or perhaps race due to their prejudices. In interpreting wage differences, and so in considering human capital investments as well as the incentives intended for investment, it is necessary to hit the right harmony between determining earning differences to unobserved heterogeneity, compensating wage differentials and labor market defects. 2 . Uses of Human Capital

The standard approach in labor economics views man capital like a set of skills/characteristics that enhance a worker's productivity. This really is a useful starting point, and for most practical uses quite sufficient. Nevertheless, it may be useful to distinguish between some complementary/alternative ways of thinking about human capital. Here is a conceivable classification:

(1) The Becker view: individual capital can be directly within the production procedure. More clearly, human capital increases a worker's production in all jobs, though probably differentially in different tasks, organizations, and situations. In this view, although the role of human capital in the production method may be quite complex, there is also a sense through which we can consider it represented (representable) by a unidimensional object, such as the stock some

Lectures in Labor Economics

of knowledge or skills, l, and this share is immediately part of the creation function.

(2) The Garden enthusiast view: relating to this view, we should certainly not think of individual capital since unidimensional, seeing that there are many a large number of dimensions...