Human Capital: Key to Growth
Human capital is a major force in the economy, so building human capital was the focus in a casual question-and-answer session with Institute Chair Gary S. Becker, a pioneering scholar in the field.
“Economic growth is the key to rising standard of living, and human capital is essential to growth,” said Becker, the 1992 Nobel Laureate told an audience of 70 invited guests at the Gleacher Center on December 12.
The modern economy is based on knowledge, not strength and brawn, Becker noted, and in an information-based economy, the countries that are going to succeed are those that have an educated workforce with the knowledge and skills to use technology effectively, he said.
Evidence for the value of human capital is seen in a significant, long-term wage differential rewarding those who earn a college degree. This return on investment in a college education has increased enormously over time.
This leads to what Becker called “an example of good income inequality,” because the wage gap motivates people to seek higher education. “There’s been a worldwide boom in education, everywhere. Look at China, for example,” Becker said. “It’s really poor country, but not as poor as 30 years ago, and part of that is because China been moving at a really rapid pace to increase the fraction of those with secondary education and university degrees.”
In contrast, the U.S. is falling behind, relative to the rapid advance in other countries. “We’ve been stagnating. Since 1970, the fraction graduating from secondary schools is flat, while graduation rates around the world have boomed. We moved from highest share of graduates to about 26th. We now rank 15th or 16th in college education.”
Today, 30 percent of high school males don’t graduate, and high school dropouts do worse on every single dimension in life: earnings, health, marriage, crime, and more, Becker said. “It’s a crying shame we’re taking good human capital and condemning them to this terrible existence in a modern economy where knowledge and information is the name of the game, and they have neither.
Edward P. Lazear, chairman of the Institute’s Board of Overseers, asked Becker about specific reforms to the education system that could increase high school and college graduation rates. Becker pointed to three areas where structural reforms would help:
- The freedom to start charter schools, which would create competition that drives school improvement.
- Vouchers, an idea championed by Milton Friedman that allows school choice and again, introduces competition.
- Better pay for the best teachers, to attract talent to the field, with more flexibility to remove poor teachers.
However, Becker pointed out, “Educational success is not only a function of schools. Family is important and many other factors play into it. Long-term, this is not something we’re not going to change quickly.”
A faster way to improve the stock of human capital in the U.S. is through immigration, by implementing a fee-based entry system for educated individuals.
“The US has one of the worst immigration policies in the developed world. We provide the least emphasis on [bringing in] skilled workers. I propose that we radically change the system to allow anyone—not terrorists—to come in at a given price, say, $50,000. Who’s going to put up that money? Skilled people; young people who can a recover that over a lifetime; people who are ambitious for themselves or for their children. You’d get people willing to make a long-term commitment.”
To address concerns that such a system rules out poor people, the system could include something like a student loan program, where immigrants put down 20 percent of the fee and use a payment program as a path to legalization.
“People would buy their desire to be in this country. The people who come here would gain value and add value, contribute to the economy. I think on almost any criteria one could think of, this would be the way to go.”