Download Investments in Human Capital: The People Based Economy Kevin M. Murphy

Investments in Human Capital:
The People Based Economy
Kevin M. Murphy
The University of Chicago
January 11, 2012
U.S. Real Per Capita GDP 1889-2010
Log of Real Per Capita GDP
10.75
10.25
9.75
9.25
8.75
8.25
1880
1900
1920
1940
1960
1980
2000
Where Does Growth Come From?
• There are three primary sources of growth
• Investment in physical capital
• Investment in human capital
• Improvements in technology (knowledge)
• Primary goals of policy should be to
• Maintain the incentive for physical investment
• Provide an environment that fosters the growth of
human capital
• Provide rewards for innovation
How do People Fit into the
Economic Picture?
• People are important as both inputs and outputs
• Human capital is our most important input
• Accounts for roughly 65 percent of our productive capacity
• With increasingly mobile capital and technology, countries
will be increasingly defined by their human capital
• The production and maintenance of human capital is
our most important output
• Education
• Healthcare
• On the job training
Human Capital has Been at the Center of
Some of the Most Important Economic
Developments of Our Lifetimes
• Increases in the return to education and skills
have revolutionized labor markets and society
• Increased human capital is essential for taking
advantage of new technologies and
innovations
• Technological changes have increased the
value of education outside of the workplace as
well
The Rising Importance of Education
(Based on Becker & Murphy 2007)
Education Wage Premiums
2.3
Relative Wage
2.1
College Graduates
1.9
Graduate School
1.7
1.5
1.3
1965
1975
1985
1995
2005
Education Premiums by Gender
1.8
Relative Wage
1.7
1.6
1.5
1.4
Women
Men
1.3
1.2
1965
1975
1985
1995
2005
Education Premiums by Race
1.8
Relative Wage
1.7
1.6
1.5
Blacks
Whites
1.4
1.3
1965
1975
1985
1995
2005
Overall Rise in Wage Inequality for Men
Indexed Real Wage (1967=100.0)
180.0
160.0
10th Percentile
50th Percentile
140.0
90th Percentile
120.0
100.0
80.0
1966 1971 1976 1981 1986 1991 1996 2001 2006
Wage Growth by Percentile 1968-2004
0.60
Real Wage Growth
0.50
0.40
0.30
0.20
0.10
0.00
5
15
25
35
45
55
Percentile
65
75
85
95
Explaining Changes In Education
Returns Using Supply & Demand
• Growth in the college premium can be
explained by a very simple model
• Model based on Katz-Murphy 1992
• The model:
• Demand grows steadily over time driven by techincal
change and new capital investment
• Fluctuations in supply cause education premiums to
fluctuate
• Supply grows faster than demand  premium falls
• Demand grows faster than supply  premium rises
Supply Growth & Relative Wages
2.20
2.00
Actual Wage Ratio
Predicted Wage Ratio
1.80
1.60
1.40
1.20
1963
1973
1983
1993
2003
The Supply Response
• Growth in the college premium has generated
a predictable response – more people have
gone on to college
• But many students (particularly men) are
poorly prepared for college
Wage Ratios & College Enrollment
0.50
1.8
Attendance
Wage Ratio
1.7
1.6
0.45
1.5
0.40
1.4
0.35
1965
1975
1985
1995
1.3
2005
Wage Ratio
Fraction of 20-25 Yr. Olds with Some
College
0.55
FRACTION OF 30- TO 34-YEAR-OLDS WITH COLLEGE
EDUCATION,
UNITED STATES, BY SEX