Becker’s initial ideas about human capital were controversial at the time he introduced them in the 1960s, but have now become widely accepted. Becker was also one of first to apply econometric principles to social issues, looking at why parents act altruistically towards rotten kids (according to Becker, it’s a form of investment in retirement), or how criminals plan their illicit activities by applying their own cost-benefit analysis to the situation. While this so-called “social math” has been popularized recently by writers such as Malcolm Gladwell and Freakonomics author and economist Steven Levitt (with whom Becker works at the University of Chicago), Becker put social problems under the economic lens as early as the late ’50s.
Becker recently took some time with MoneyWatch.com contributor Edmund Lee to discuss his current views of human capital and how best to increase it, why a liberal arts education is the best asset to have in a volatile economy, and how he’s managed, even at the age of 78, to increase his own human capital.
How have your ideas about human capital changed since your original research in the 1960s?
Well, it’s become much more pervasive than I would have anticipated. People apply the concept now not only to labor markets but also to a lot of other types of activities — like health care. I think the concept overall has a much broader applicability today.
Can you still increase your human capital by investing in education as much as you could in the past?
The benefits of education in terms of earnings have exploded during the last 30 years and are much higher than when I was first writing about this — and that’s been one of the surprises. The people who drop out of high school, and even many high-school graduates who have no college education, are really at a tremendous disadvantage in the economy. They have much lower earnings and greater unemployment.
Over your employment lifespan, you may have to change jobs across companies more frequently than in the past. What people should look for then as they invest in their human capital is more flexibility. Instead of having human capital that would be particularly useful for one company or even one occupation narrowly defined, you should try to recognize that the future may involve working at another company or in a somewhat different occupation. So look for flexibility.
What kind of education affords such flexibility?
A liberal arts education. I wrote about this 40 years ago, but I think it’s become even more important today. In an uncertain world, where you don’t know what the economic situation will be like 20 years from now, you want an education based on general principles rather than on specific skills.
So what about someone who may be mid-career? Can this person go back to school, or take on almost any amount of educational debt, and still get a return on that investment?
I know we’ve seen a strong trend toward greater adult education of various forms — more people mid-career are taking courses. This is connected to the greater uncertainty in the economy. So, yes, this means that your investment in education cannot stop when you finish college. You have to continue to invest because new things come along, like the Internet.
When I was at school, the computer was just beginning to get started. They were these giant things. With the development of the personal computer and the Internet, one had to retrain oneself, which I had to do. There’ll be other things coming along in the future — who knows what they’ll be, but there’ll be various things. But there again, a foundation when you were first in school that gave you greater command of basic principles will allow you to relearn more easily mid-career.
So now you’ve retrained yourself in the computer arts, and you even have a blog. Does the advent of personality-driven blogs and the value attached to celebrity suggest that human capital is becoming more dependent upon creativity and personality?
I’m not sure about that. I haven’t seen any data to support that idea. But there’s one aspect of this that may have become more important. A number of activities, including blogs, have a very skewed distribution of rewards. That’s sometimes called a superstar phenomenon, where somebody who’s only a little bit better than somebody else can command a great deal of the rewards, either in income or in other measures of prestige. That has definitely increased. And, yes, in order to achieve that position, one has to be more creative.
But a general education is still the more important factor. Just look at earnings. In the 1970s, the average college graduate earned about 40 percent more per hour than the average high-school graduate. Now it’s about 80 percent. And it’s an even bigger difference for postgraduates. The advantages of a typical college education have really grown enormously. Not only in the United States. I’ve been able to document that for many parts of Latin America, Asia, and Europe as well.
Has international competition reduced the value of the U.S.’s human capital?
No, but what I think it has done has made human capital even more important. Other countries have caught up with the U.S., to some extent, in the propensity of their students to go on to higher education. In some instances, they have surpassed us. For instance, we have shockingly high rates of teenagers who drop out of high school. And it’s hardly improved at all in the last 30 years. Countries like South Korea, some of the European countries, and Japan — almost all their students graduate high school. South Korea, a much poorer country, has a larger fraction of high-school graduates who finish college than we do. So I think we have to make a renewed effort in the educational area. We’re doing well, but we can do even better.
More baby boomers have been forced to postpone their retirement because of the economic crisis. What does this trend mean for the value of their human capital?
I think it’s a very good trend — despite the weak economic environment and the fact that people have lost the value of their savings. As we’ve become healthier, mentally and physically, it made little sense for retirements to start in one’s early 60s. By age 65, most people have retired, and that was an incentive created by the Social Security system.
Many people are healthy enough and like their work enough that they would prefer to continue to work if they didn’t have incentives not to do so. It does mean that when you invest in your human capital, you have to think of it not as a very short-term or a medium-term investment, but as a long-term one, extending not only into the early 60s but into the 70s and maybe even beyond for some people.
Do you really think most people would want to work past 65?
I think people would want to do that if they had neutral incentives. Some people hate their work and they can’t wait to retire — that’s fine. But a lot of people not only like the income but even like their work, and they would prefer to continue to work and maybe never retire.
Sounds like that’s the category you’d put yourself in.
[Laughs] Yes, it is. We always said human capital is an investment with a long life, but it’s even longer as people extend their working time in their later age. Also, given the difficulties faced by the Social Security system and the Medicare system, later working time is almost a necessity if we’re to meet those future obligations.
So how would you create these “neutral incentives” to work? Sounds like you’d favor an overhaul of Social Security.
I’ve been a strong supporter of individual accounts, which people can save into tax-free. And whenever they do retire — and that would be their choice — they would get access to that account. I think we should convert pay-as-you-go Social Security into something similar to IRAs but much more extensive, covering the bulk of the population rather than just a really small fraction of higher-income people.
Unemployment is currently at 9.4 percent. How can the U.S. restore the value of its human capital?
Recessions lead to higher unemployment. And this is a tough recession. But so far we have a lower unemployment level than we had in 1981 to 1982, when we reached almost 11 percent. The main thing one wants to maintain is a very flexible labor market, but combine that with a fairly robust system of unemployment compensation. But we have to have flexibility that enables people and companies to either change employees or change jobs, and that makes it much easier to adapt to international shocks. We don’t want to lose the great flexibility of the labor market.
