A Brief Analysis of the Human Capital Theory
RUNNING HEAD: A Brief Analysis of the Human Capital Theory, Signaling Theory
and Externalities
A Brief Analysis of the Human Capital Theory, Signaling Theory and
Externalities
Phyllis R. Bennette
University of Maryland University College
OMDE 606
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A Brief Analysis of the Human Capital Theory
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Abstract
The purpose of this paper is to provide a brief exposition on Human Capital
Theory (HCT) in terms of analyzing its meaning, characteristics and main tenets and
identifying other theories and beliefs which undermine or run counter to HCT. The paper
closes with providing a supportive basis why people continue their education for reasons
other than remuneration.
What is Human Capital Theory (HCT)
HCT is the belief that people invest substantially in themselves in order to
enhance their skills and knowledge and that this investment reaps positive earnings in
terms of return on investment (ROI) for the individual and society. Unlike physical
assets, HCT is often overlooked and tricky to measure. Once thought to be a negative
connotation (human chattel), people now consider themselves as capital investors in
themselves (Schultz, 2002). In a broader sense, HCT is categorized as direct
expenditures in health, relocation/migration, and education in terms of formal schooling,
on-the-job training and through one’s own initiative (Schultz, 2002). According to
Schultz (2002) truisms of HCT purport that:
#1: As people become more educated, they become more productive.
#2: Skills and knowledge are human components which feed into the
productivity “black box” to generate ROI and economic growth.
A Brief Analysis of the Human Capital Theory
#3: Various types of discrimination (sexism, racial etc) can account for the
differences in economic growth when examining explicit
characteristics of human capital investment.
#4: Unlike countries like the U.K., Germany and the U.S., third world
countries must have substantial human capital investment in
addition to infrastructure to obtain optimal ROI to sustain their
economic growth (Perraton, 2000).
#5: Our society is filled with imperfections and barriers (poor tax laws,
various forms of discrimination etc.) which fail to recognize
human capital as a valuable component.
#6: Once consumption dollars are separated from investment dollars
related to human capital, it is believed that net gains are still
realized.
#7: Earnings directly correlate to one’s absolute level of education.
Theories and Beliefs Which Differ from HCT
Unlike HCT the screening or signaling theory maintains that when individual A
acquires education which puts him educationally “on par” with individual B, then
individual B will acquire more education to signal that he is in fact not homogenous to
individual A, but different or set apart (Walker & Zhu, 2003, p 146). Furthermore, his
wages depend on relative education levels (a differing factor) rather than absolute
education levels as with HCT in his effort to exceed “the Joneses”. Lastly, individual B
is not concerned about the additional education acquired by individual A in regards to
HCT (Walker & Zhu, 2003, p 146).
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A Brief Analysis of the Human Capital Theory
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Credentialing supports both the HCT and signaling theory to convey educational
status; however, there are a number of issues surrounding it such as the quality of the
degree and recognition of it across various institutions and countries. But sometimes
various factors are examined rather than just one factor (education) when determining the
best-fit person for the job. This is what is known as “positional goods” or ranking by
desirable traits or abilities as coined by Hirsch in 1977. In this case, having the “best”
education may not prove to be the winning factor, but rather the most acceptable
transaction cost for the highest productivity received.
Benefits beyond Remuneration
Conclusion
In closing, Rumble (2007) shares that social morality should prevail in order to
allow everyone to lead a “good life” through adequate availability of resources. This
includes the use of distance education which perhaps becomes a formidable equalizer in
eradicating society’s social ills to leading “bad lives”.
A Brief Analysis of the Human Capital Theory
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References
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