Human capital is NOT formal education

Greg Mankiw writes about human capital, and the implication from his post is that human capital is synonymous with formal education.

This is a completely false understanding of human capital.

For the purpose of this post, I define human capital as that mysterious something which allows one person to make $200,000/year or even $1 million/year, while other less fortunate people are earning the minimum wage.

It should be obvious that education is only a tiny part of what constitutes human capital, because immediately after a person graduates from college he is able to earn only a slight bit more than he was before he had a college degree. There are many college grads waiting tables, working at Starbucks, etc. The market puts no value at all on their college degree, indicating that the college education is not what’s creating the human capital.

It is the work experience which allows people to earn more money, so this means that people accumulate human capital by working at jobs.

One may even go so far as to say that a college degree, instead of imparting human capital, actually acts as a barrier to entry limiting the number of people who can board career tracks where they obtain the genuine human capital.

Comments

[Dan Morgan]

In many jobs I think it is true that "education is only a tiny part of what constitutes human capital". Intelligence, motivation, and skills learned on the job are what is most important.

In the more technical fields though this is less true. Significant amounts of what was learned in college directly contributes to jobs skills. I earned a degree in electrical engineering 25 years ago, and those years in college still matter. I think that most engineers would agree with this.

[The Superfluous Man]

"It is the work experience which allows people to earn more money"
So why isn't everyone with equal experience paid equally, if that's what human capital is. Blank Slate Marxism, eh? Strictly speaking, you could wiggle out of that by saying that people accumulate experience, ie. learn, at different rates (which is a common definition for intelligence).

Ceteris Paribus (all other things equal), productivity is responsible for variation in salaries. And productivity is (generally) chiefly a function of intelligence, as well as conscientiousness and other factors. Expierhttp://www.owlnet.rice.edu/~psyc231/Readings/schmidt.htm

In other words, not everyone can get a six digit salary programming job and not just because of their lack of "experience." In the above study, the authors found that "After that [5 years], the curve [of productivity] becomes increasingly horizontal, and further increases in job experience produce little increase in job performance.." while "By contrast, GMA [General Mental Ability - IQ] continues to predict job performance indefinitely" So that mysterious quality that is human capital is left undiscovered by your post. You know about IQ, and yet you seem to fail to compute its effects. Mr. Mankiw relative to his ignorance is more sensible.

[beowulf]

TSM,

And where you get your degree is seen as a proxy for your IQ. Something I didn't realize when I applied to law school is that EVERYONE in the legal field assumes that a student will attend the highest ranked (with the highest LSAT scores) law school that they were accepted in.

Even though an elite law school may have tuition 5 times more expensive than a state university law school, its penny wise pound foolish to save money by going with the lower tuition.

if you're accepted to both but choose to go with the state school, every law firm or judge you seek employment with will assume you couldn't get into a "better" school and will automatically rate your abilities in line with the reputation of your school.

What's odd is that there already is an objective test of who the smartest law students are-- the bar exam. Law firms could just hire the students with the highest scores (and factor in whatever grade point, law review or interview requirements they wish to set).

But that would be as crazy as trying to recruit for the foreign service by some kind of exam, would never happen. :o)

[David]

One may even go so far as to say that a college degree, instead of imparting human capital, actually acts as a barrier to entry limiting the number of people who can board career tracks where they obtain the genuine human capital.

College is clearly a screening tool more than a training ground. I have never spoken to a hiring manager who believed, or interviewed an applicant myself and believed, that a (non-vocational) college education in itself "caused" someone to become qualified to do a job. It's simply nonsense.

I think a minority of twentysomething college graduates literally have more useful knowledge than they did before college. Another minority segment may have had transformative personal experiences in college. The majority, at least half, of those who entered college in their teens were simply marking time. (Adults who go to college are a different case.)

I would also go further and say that work experience does not constitute human capital. "Human capital" means nothing more than one's potential value, which is not only circumstantial, but dependent on the subjective evaluation of someone with authority.

[Half Sigma]

Dan Morgan, agree that some vocational oriented fields impart direct human capital, including teaching, nursing, medical school, and engineering (although the country seems to be graduating more engineers than it needs because I know a lot of engineering grads who do stuff like computer programming and technical writing).

Superfluous, I've already gone over the fact that IQ isn't valued by employers. IQ is only good for getting an educational credential which then allows the credential holder to get into a career track where he can aquire the human capital.

There are lots of people dumber than me who got into more lucrative career tracks and who are, consequently, making massively higher incomes.

[Peter]

It should be obvious that education is only a tiny part of what constitutes human capital, because immediately after a person graduates from college he is able to earn only a slight bit more than he was before he had a college degree. There are many college grads waiting tables, working at Starbucks, etc. The market puts no value at all on their college degree, indicating that the college education is not what’s creating the human capital.

I should have you talk to my wife. She graduated from nursing school earlier this year, with a 2-year degree that qualified her as a registered nurse, and her salary at a major hospital more than doubled literally overnight. Her experience is hardly unique. Get a degree in nursing and your earnings are likely to go way up, compared to what you'd been previously making. The same is true for other health-care fields, as well as engineering, some IT-related fields, maybe accounting, and I'm sure there are others.
If you're talking about liberal arts - or law school, which I consider just an extension of liberal arts college - then yes, getting the degree has little effect on your earnings, at least at first. But for Christ's sakes, it's been common knowledge for decades that some college degrees simply aren't marketable. Unfortunately that doesn't stop millions of young people from pursuing toilet-paper diplomas, all the while thinking "it can't happen to me - I'll get a good job." Guess what - it can and probably will happen to you.

[Half Sigma]

"She graduated from nursing school earlier this year, with a 2-year degree that qualified her as a registered nurse, and her salary at a major hospital more than doubled literally overnight."

I mentioned in the comment above that nursing is a vocational program which does impart direct human capital. Although it's interesting that her salary doubled immediately after obtaining the credential, instead of slowly increasing as her nursing knowledge increased. It's the credential that's valued and not the knowledge behind it.

[mickslam]

Hey, if you get the chance HS, read the book 'The Diamond Age' by Neil Stephenson. Addresses how to raise kids, social groups and many other really interesting things.

Anyway:

Something I didn't realize when I applied to law school is that EVERYONE in the legal field assumes that a student will attend the highest ranked (with the highest LSAT scores) law school that they were accepted in."

Every lawyer I've ever talked with has said to me, if you go to law school go to the best one you get into. In fact, many have said if you don't get into a good school, don't bother going.

I think guys like Greg are old school, lump it all together people. When they think Human Capital, what can be the closest proxy or indicator? How can you quantify this? Typically, today, you might say 'college education' is that proxy. Its lame, yep, but possibly the best objective measure out there.

And I very much agree, people use degrees today as a screening process, not as an indicator of talent or ability.

[Peter]

I mentioned in the comment above that nursing is a vocational program which does impart direct human capital. Although it's interesting that her salary doubled immediately after obtaining the credential, instead of slowly increasing as her nursing knowledge increased. It's the credential that's valued and not the knowledge behind it.

I didn't see your prior comment mentioning nursing until after I'd posted mine.
It does appear that the credential is the main thing when it comes to nursing pay. Pay doesn't increase with experience all that much in nursing, beyond the normal annual raises, though the fact that hospitals run 24/7 means that nurses have fairly good opportunities to move into management as shift leaders at higher pay.

[Russ]

Get ready for human capital to decrease even more

http://www.nytimes.com/2006/07/20/technology/20pogue.html?ex=1153627200&en=1729a06e11d8c547&ei=5087%0A

Dictation software that actually works.

Just hook it up to translation software and your ability to speak english (read: starbuck employees) is no longer an asset.

[The Superfluous Man]

"Superfluous, I've already gone over the fact that IQ isn't valued by employers. IQ is only good for getting an educational credential which then allows the credential holder to get into a career track where he can aquire the human capital."

IQ isn't important, but then it is? I would agree that past some fuzzy, arbitrary threshold, it matters less, due to current practices. But within a profession (which controls for selection bias, which the GSS survey does not) I'm not so sure that other factors matter more (eg, whether an engineer is promoted for his productivity/intelligence or some superficial factor). You've shown data that cuts across industries, allowing for all sorts of biases. What's necessary is looking at multiple industries or professions individually.

[The Superfluous Man]

I meant to say I do not know whether IQ is significantly responsible for variation in pay/rank within an industry, as I haven't seen the pertinent data.

[SFG]

"One may even go so far as to say that a college degree, instead of imparting human capital, actually acts as a barrier to entry limiting the number of people who can board career tracks where they obtain the genuine human capital."

Ah, but a college degree from WHERE, HS? That's one of the main themes of your blog. I would instead argue that college prestige acts as a sorting mechanism whereby opportunities are doled out according to society's preferences. In our case that means athletes and legacies. European countries use straight academics from what I understand. Come on, give the Eurocommies credit for something.

Superf: Iq responsible for variation in pay/rank? I'm sure some of our friends in IT could testify tha IQ goes DOWN as you move up ranks of management, although there are areas like fast food where the bottom ranks are pretty dim. On average.

HS has shown pretty well that being too smart is bad for you. I've learned my lesson and am marrying a dumb girl, so my kids will be just smart enough to be successful.

[Jody]

To a certain extent, IQ is not the dominant factor in management (though as always, it helps). Instead, I think interpersonal skills (e.g., talent assessment, motivational ability, and yes empathy) are the most important skill set for management.

I think the lack of strong correlation between the skill sets needed for management and the skills needed for actual work neatly explains why "IQ goes DOWN as you move up ranks of management."

[Ed Kohler]

I think many of the most wealthy among us are the best at leveraging their human capital. Where are they picking up the knowledge and ideas that help them increase their earning potential? Why do they see the value in efficiencies others don't grasp?