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What is it?
Economic theory

Based on the idea that education increases an individual’s value

By increasing your education, or academic achievements, your value increases as well as your returns

The theory shows that an educated work force increases production, which leads to a stronger economy (Resnik, 2006)

“In essence, HCT suggests that education increases the productivity and earnings of individuals; therefore, education is an investment” (Tan, 2016, p. 412).

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Influences an individual’s decision to pursue higher education or to return at later ages.

The opportunity costs of returning to school for higher education is high as it is a high economic investment (Jepsen & Montgomery, 2012)

“Horace Mann contended that schooling will ultimately put an end to poverty” (Adams, 2016) which further emphasizes that educating people can bring solutions to global problems

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The Father of Human Capital Theory

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Explained the shift from labor industrial economies to white collar work force economies

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Coined the name "Human Capital Theory"

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Works Cited is Included

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Human Capital Theory Cheat Sheet - GROUP 2

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1. Evaluation of the direct linkage between education and training, or input and the output of is easier.  There has been extensive research on the correlation between education and economic growth and national development - many of these research studies are documented and reported in the sources cited below.

2. Human Capital Theory provides a lens to create policy that motivate individuals to invest in education. Patrinos and Psacharopoulos (2008) report on the non-economic and external benefits of education - including health, crime rates, social participation, etc (p. 347).  This research can help inform policy and investment decisions that encourage more schooling.  It may also provide a basis for studying the efficiency and quality of schooling to achieve specific desired outcomes.

3. HCT is a tool that can help answer questions about appropriate level of social investment in education, the quality of investments that are most productive, and when these investments should be made.

4. Resnick (2006) discusses the research and planning that came out of this education-economic growth idea and the various approaches that sought to plan and estimate the needs to education systems based on the expected rate of economic growth (p. 183-184).

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1. While there are many empirical research studies that prove a positive correlation between education and economic growth, there are some empirical studies whose results don’t align with this and sometimes show a negative correlation (i.e. in the case of Venezuela cited in Tan (2014, p. 425-426).

2. Human Capital Theory may lead to the view that education is a single input when it should be viewed and applied in specific contexts.  As a result, education is often left out of upper level applications such as national income accounts (Berks, 2011, Lecture 1 on Human Capital)

A final criticism is that HCT assumes education increases productivity and therefore wages, but doesn’t offer much insight into the processes that translate education into higher wages.  Netcoh (2016) reports that education and training account for about 30 percent of the variance in individual wages.  This leaves about 70 percent of individual wage variability unexplained by HCT.  This further supports the idea that education is not a single input and economic growth is affected by a variety of social and cultural contexts, for example the quality of education in urban schools versus suburban schools.

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“[Classical and neoclassical economists] regarded education as part of capital (which along with land and labor, represents factors in the production of wealth).]” - Resnick (2006), p. 183

“A man educated at the expense of much labor and time… may be compared to one… expensive machine… The work which he learns to perform… over and above the usual wages of common labor will replace the whole expense of his education” – Adam Smith quoted in Psacharopoulos & Patrinos (2008), p. 341

“[HCT] is a comprehensive approach to analyze a wide spectrum of human affairs” with education being at the center and as “the source of economic development” (Tan, 2016, p. 411)

“Human capital theory proposes that individuals regard education as an investment; as in, a risk versus a return prospect” (van der Mewre, 2010, p. 91)

“I urge you not to confuse manpower or human resources with human capital.” (Schultz, 1989, p.219)

“For me it took a lot of on the job experience to learn that the simplifying assumption that capital is homogenous is a disaster for capital theory, and that the assumption that the heterogeneity of various forms of capital as economic conditions change can be transformed into a homogenous stock of capital is untenable.” (Schultz, 1989, p. 220)

“Wherever we turn in investigating the increases in the earnings from work over time, we find that specialization, human capital and productivity go hand in hand.” (Schultz, 1989, p. 220)

“The abilities to read and write are critical components of the quality of the human capital of any population.” (Schultz, 1989, p. 222)

“The key to economic growth is to expand the level of investment in terms of fixed capital (factories, machines) and “human capital” (people as workers).” (Peet, R. and Hartwick, E. 2009)

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Adams, S. (2016, April 24) Human capital theory. [video] retrieved from https://www.youtube.com/watch?v=M_5NcLazCwQ

An overview of what Human Capital Theory is and how it applies to economics and organizational management/structure.

Becker, Gary. (January 6, 2011) Lectures on Human Capital [Video Series] retrieved from https://youtu.be/QajILZ3S2RE?list=PL9334868E7A821E2A

Series of 19 lectures given by Dr. Gary Becker on Human Capital from the microeconomic to the macroeconomic level.

Olaniyan, D. A., & Okemakinde, T. (2008). Human capital theory: Implications for educational development. Pakistan Journal of Social Sciences,5(5), 479-483.

Formal education improves the production capacity and economic growth of a nation.  Investments in high quality education that meets the skill-demand needs of the nation's economy has a positive correlation with economic growth and development.

Tan, E. (2014, September 1) Human capital theory: A holistic criticism. Review of Educational Research 84(3), p. 411 - 445 doi: 10.3102/0034654314532696

A thorough overview of the major criticisms of the Human Capital Theory

Welch, F. (1970) Education in production. Journal of Political Economy. 78, 35-39

This article discusses the work effect from the allocation effect of education as it related to farmers demonstrating the favorable returns to schooling and higher education in this population.