Investment in Human Capital A Theoretical Analysis

This PDF is a selection from a published volume from the National
Bureau of Economic Research
Volume Title: Investment in Human Beings
Volume Author/Editor: Universities-National Bureau Committee for

Economic Research
Volume Publisher: The Journal of Political Economy Vol. LXX, No.

5, Part 2 (University of Chicago Press)
Volume ISBN: 0-87014-306-9
Volume URL: http://www.nber.org/books/univ62-3
Conference Date:
Publication Date: October 1962
Chapter Title: Investment in Human Capital: A Theoretical Analysis
Chapter Author(s): Gary S. Becker
Chapter URL: http://www.nber.org/chapters/c13571
Chapter pages in book: (p. 9 - 49)

INVESTMENT IN HUMAN CAPITAL: A THEORETICAL ANALYSIS'
GARY S. BECKER
Columbia Universityand National Bureau of Economic Research
I. INTRODUCTION prove the physicaland mentalabilitiesof

SOME activities
primarily
affectfu- people and thereby raise real income
ture well-being,while others have prospects.
their main impact in the present. People differ substantially in their
Dining is an example of the latter,while economic well-being,both among coun-
purchaseof a car exemplifiesthe former. tries and among familieswithin a given
Both earningsand consumptioncan be country.For a while economistswere re-
affected: on-the-job training primarily lating these differencesprimarilyto dif-
affectsearnings,a new sail boat primari- ferencesin the amountof physicalcapital
ly affects consumption, and a college since richer people had more physical
education is said to affectboth. The ef- capital than others. It has become in-
fectsmay operateeitherthroughphysical creasinglyevident,however,fromstudies
resources,such as a sail boat, or through of income growth2that factors other
human resources,such as a college edu- than physical resources play a larger
cation. This paper is concerned with role than formerlybelieved, thus focus-
activities that influencefuture real in- ing attention on less tangible resources,
come throughthe imbeddingof resources like the knowledgepossessed. A concern
in people. This is called investing in with investment in human capital,
human capital. therefore,ties in closely with the new
The many ways to invest include emphasis on intangible resources and
schooling, on-the-job training, medical may be usefulin attemptsto understand
care, vitamin consumption,and acquir- the inequality in income among people.
ing information about the economic The original aim of my study was to
system.They differin the relativeeffects estimate the money rate of return to
on earnings and consumption, in the college and high-schooleducation in the
amount of resourcestypically invested, United States. In orderto set these esti-
in the size of returns,and in the extentto mates in proper context I undertook a
briefformulationof the theoryof invest-
which the connection between invest-
ment in human capital. It soon became
mentand returnis perceived.But all im-
clear to me, however, that more than a
1 I am greatlyindebtedto the CarnegieCorpora- restatementwas called for: while im-
tion of New York forthe supportgiven to the Na- portant and pioneeringwork had been
tionalBureau ofEconomicResearchto studyinvest- done on the economic returnto various
mentin educationand otherkindsofhumancapital.
2 The evidence for the United States appears to
I benefitedgreatlyfrommany discussionswith my
colleagueJacob Mincer,and also withotherpartici- show that the growthin capital per capita explains
pants in the Labor Workshopof Columbia Univer- onlya small part ofthe growthin per capita income
sity. Althoughmany personsofferedvaluable com- and that the growthin "technology"explainsmost
mentson thedraftpreparedfortheconference,I am ofit. On thissee S. Fabricant,EconomicProgressand
especially indebted to the detailed comments of EconomicChange:34thAnnual ReportoftIe National
TheodoreSchultz,GeorgeStigler,and ShirleyJohn- Bureau of EconomicResearch(New York: National
son. Bureau of Economic Research, 1954).
9
This content downloaded from 198.71.7.231 on Tue, 07 Apr 2015 12:57:41 UTC
All use subject to JSTOR Terms and Conditions
1() GARY S. BECKER
occupationsand educationclasses,3there The typical investorin human capital is

have been few,if any, attemptsto treat more impetuousand thus more likelyto
the process of investingin people from errthan is the typicalinvestorin tangible
a general viewpoint or to work out a capital. What a diverseand possiblyeven
broad set of empirical implications. I confusingarray! Yet all these as well as
began then to prepare a generalanalysis many other importantempirical impli-
of investmentin human capital. cations can be derived fromvery simple
As the work progressed, it became theoretical arguments. The purpose of
clearerand clearerthat much more than this paper is to set out these arguments
a gap in formaleconomicanalysis would in some generality,with the emphasis
be filled,for the analysis of human in- placed on empirical implications, al-
vestmentoffereda unifiedexplanationof though little empirical material is pre-
a wide range of empirical phenomena sented. My own empiricalwork will ap-
whichhad eitherbeen given ad hocinter- pear in a later study.
pretations or had baffledinvestigators. First, a lengthydiscussion of on-the-
Amongthese are the following:(1) Earn- job trainingis presentedand then,much
ings typicallyincrease with age at a de- morebriefly,discussionsofinvestmentin
creasing rate. Both the rate of increase schooling,information,and health. On-
and the rate of retardationtend to be the-job trainingis dealt with so elabo-
positivelyrelatedto the level of skill. (2) rately not because it is more important
Unemploymentrates tend to be nega- than otherkindsof investmentin human
tively related to the level of skill. (3) capital-although its importanceis often
Firms in underdeveloped countries ap- underrated-but because it clearlyillus-
pear to be more "paternalistic" toward trates the effectof human capital on
employeesthan those in developed coun- earnings, employment,and other eco-
tries. (4) Younger persons change jobs nomic variables. For example, the close
morefrequentlyand receivemoreschool- connectionbetween foregoneand direct
ing and on-the-job training than older costs or the effectof human capital on
personsdo. (5) The distributionof earn- earnings at differentages is vividly
ings is positively skewed, especially broughtout. The extendeddiscussionof
among professional and other skilled on-the-job training paves the way for
workers.(6) Abler persons receive more muchbrieferdiscussionsofotherkindsof
education and other kinds of training investmentin human beings.
than others. (7) The division of labor is II. DIFFERENT KINDS OF INVESTMENT
limitedby the extentof the market. (8) A. ON THE JOB
I In additionto the earlierworksof Smith,Mill, Theories of firmbehavior, no matter

and Marshall,see H. Clark,LifeEarningsin Selected how they differin otherrespects,almost
Occupationsin theU.S. (New York: Harper & Bros.,
1937); J. R. Walsh, "Capital Concept Applied to invariablyignorethe effectofthe produc-
Man," QuarterlyJournal of Economics,February, tive process itselfon workerproductiv-
1935; M. Friedmanand S. Kuznets,IncomefromIn- ity. This is not to say that no one
dependent ProfessionalPractice(New York: National
Bureau ofEconomicResearch, 1945); G. Stiglerand recognizes that productivityis affected
D. Blank, The Demand and Supply ofScientificPer- by the job itself;but the recognitionhas
sonnel (New York: National Bureau of Economic not been fonnalized, incorporated into
Research,1957); and T. W. Schultz,"Investmentin
Man: An Economist'sView," Social ServiceReview, economic analysis, and its implications
June,1959. worked out. We now intend to do just
INVESTMENT IN HUMAN CAPITAL: A THEORETICAL ANALYSIS 11
that, placing special emphasis on the where W equals wages or expenditures

broader economicimplications. and MP equals the marginalproduct or
Many workersincrease their produc- receipts. Firms would not worry too
tivityby learningnew skills and perfect- much about the relation between labor
ing old ones while on the job.. For ex- conditions in the present and future
ample, the apprentice usually learns a partly because workerswere only hired
completelynew skill while the internde- forone period,and partlybecause wages
velops skills acquired in medical school, and marginalproductsin futureperiods
and both are moreproductiveafterward. would be independentof a firm'scurrent
On-the-job training, therefore, is a behavior.It can thereforelegitimatelybe
process that raises future productivity assumed that workershave unique mar-
and differsfromschool trainingin that ginal products (for given amounts of
an investmentis made on the job rather other inputs) and wages in each period,
than in an institutionthat specializes in which are, respectively,the maximum
teaching.Presumably,futureproductiv- productivityin all possible uses and the
ity can be improvedonly at a cost, for market wage rate. A more complete set
otherwisethere would be an unlimited ofequilibriumconditionswould be the set
demand fortraining.Included in cost are
a value placed on the time and effortof MPt= Wt, (2)
trainees, the "teaching" provided by where t refersto the tth period. The
others,and the equipmentand materials equilibriumpositionforeach periodwould
used. These are costs in the sense that depend only on the flows during that
they could have been used in producing period.
currentoutput if they were not used in These conditionsare altered when ac-
raisingfutureoutput. The amount spent count is taken of on-the-jobtrainingand
and the duration of the trainingperiod the connectiontherebycreated between
depend partly on the type of training- presentand futurereceiptsand expendi-
more is spent for a longer time on an tures. Training might lower current
internthan on an operative-partly on receipts and raise currentexpenditures,
production possibilities,and partly on yet firmscould profitablyprovide this
the demand fordifferent skills. trainingiffuturereceiptswere sufficient-
Each employeeis assumed to be hired ly raised or future expenditures suf-
fora specifiedtimeperiod (in the limiting ficientlylowered. Expenditures during
case thisperiodapproacheszero), and for each period need not equal wages,
the moment both labor and product
receipts need not equal the maximum
markets are assumed to be perfectly
possible productivity,and expenditures
competitive.If therewere no on-the-job
and receiptsduringall periods would be
training,wage rates would be given to
interrelated. The set of equilibrium
the firmand would be independentof its
conditions summarized in equation (2)
actions. A profit-maximizing firmwould
would be replaced by an equality be-
be in equilibriumwhenmarginalproducts
tween the presentvalues of receiptsand
equaled wages, that is, when marginal
expenditures.If Et and Rt representex-
receiptsequaled marginal expenditures.
pendituresand receiptsduringperiod t,
In symbols
and i the marketdiscount rate,then the
MP=W, (1) equilibriumconditioncan be writtenas
12 GARY S. BECKER
Rn
-I
t n -I
Et as the sum of opportunitycosts and out-
v (3)
lays on training,(6) becomes
0 (I +i) t=o +
MP'+G=Wo+C. (7)
where n represents the number of
periods, and R, and E, depend on all The term G, the excess of future
other receipts and expenditures. The receiptsover futureoutlays,is a measure
equilibrium condition of equation (2) of the returnto the firmfromproviding
has been generalized, for if marginal training; and, therefore,the difference
productequals wages in each period,the betweenG and C measuresthe difference
present value of the marginal product betweenthe returnfrom,and the cost of,
streamwould have to equal the present training.Equation (7) shows that mar-
value of the wage stream. Obviously, ginal product would equal wages in the
however,the converseneed not hold. initial period only when the return
If trainingwere given only duringthe equals costs, or G = C; it would be
initial period, expenditures during the greateror less than wages as the return
initialperiodwould equal wages plus the was smalleror greaterthan costs. Those
outlay on training,expendituresduring familiarwith capital theorymightargue
other periods would equal wages alone, that this generalization of the simple
and receipts during all periods would equality between marginal product and
equal marginal products. Equation (3) wages is spurious because a full equi-
becomes libriumwould require equality between
n-i the returnfroman investment-in this
MRt
MPO+O +1 ( 1 _ -
t case, made on the job and costs. If this
+0Z implied that G = C, marginal product
(4) would equal wages in the initial period.
=WO + k+E t)tX
There is much to be said for the rele-
vance of a conditionequating the return
froman investmentwith costs, but such
wherek measuresthe outlay on training.
a conditiondoes not implythat G = C or
If a new termis defined,
that marginal product equals wages.
The followingdiscussion demonstrates
G= E M1-Wt (5) that great care is requiredin the applica-
t=__ (1 +iW
tion of this condition to on-the-job
equation (4) can be writtenas investment.
APo P+G=Wo+k. (6) 1. General. Our treatmentof on-the-
job trainingproduced some general re-
Since the termk onlymeasuresthe actual sults summarizedin equations (3) and
outlay on trainingit does not entirely (7) ofwide applicability,but morecon-
measure training costs, for excluded is crete results require more specific as-
the time that a person spends on this sumptions.In this and the followingsec-
training,time that could have been used tion two types of on-the-jobtrainingare
to produce currentoutput. The differ- discussed in turn: general and specific.
ence betweenwhat could have been pro- General trainingis usefulin many firms
duced, call this MPo and what is pro- in addition to the firmprovidingit, as a
duced, MPo, is the opportunitycost of machinisttrained in the army findshis
the time spentin training.If C is defined skills of value in steel and aircraftfirms,
or a doctor trained (interned) at one Equation (7) is reduced to

hospital finds his skills useful at other MP,=WWO+C, (9)
hospitals. Most on-the-jobtrainingpre-
sumably increases the future marginal or
productof workersin the firmproviding VO=MP, -C. (10)
it, but general training would also in- In termsof actual marginalproduct
crease their marginal product in many
otherfirmsas well. Since in a competitive MPo=Wo+ k, (9')
labor marketthe wage rates paid by any or
firmare determinedby marginalproduc- Wo=MPo-k. (10')
tivitiesin other firms,futurewage rates
as well as marginal products would in- The wage of trainees would not equal
crease to firmsprovidinggeneral train- their opportunitymarginal product but
ing. These firmscould capture some of would be less by the total cost of train-
the return from training only if their ing. In otherwords,employeeswould pay
marginal product rose by more than for general trainingby receivingwages
theirwages. "Perfectlygeneral" training below their current (opportunity) pro-
would be equally useful in many firms ductivity.Equation (10) has many other
and marginalproductswould rise by the implications,and the rest of this section
same extentin all of them. Consequent- is devoted to developing the more im-
ly, wage rates would rise by exactly the portantones.
same amount as the marginal product Some mightargue that a really "net"
and the firmsproviding such training definitionof marginal product obtained
could not capture any of the return. by subtracting training costs from
Why, then, do rational firmsin com- "gross" marginal product must equal
petitive labor markets provide general wages even for trainees. Such an inter-
training,for why provide trainingthat pretationof net productivitycould for-
brings no return? The answer is that mallysave the equalitybetweenmarginal
firms would provide general training productand wages here,but later I show
only if they did not have to pay any of (pp. 18-25) that it cannot always be
the costs. Persons receiving general saved. Moreover,regardlessof which in-
trainingwould be willing to pay these terpretationis used, trainingcosts would
costs since training raises their future have to be included in any study of the
wages. Hence the cost as well as the re- relationbetweenwages and productivity.
turn from general training would be Employees pay forgeneral on-the-job
borne by trainees,not by firms. trainingby receivingwages below what
These and other implicationsof gen- could be receivedelsewhere."Earnings"
eral training can be more formally duringthe trainingperiod would be the
demonstratedwith equation (7). Since differencebetween an income or flow
wages and marginalproducts are raised term,potential marginalproduct,and a
by the same amount, MP, must equal capital or stock term,training costs, so
W, for all t = 1, .. .n-1 ,and there- that the capital and income accounts
fore would be closely intermixed, with
=__0MP-
__ t=?. ( 8) changes in either affectingwages. In
(1+it - t
8 other words, earningsof persons receiv-
t=1 ( ing on-the-jobtrainingwould be net of
14 GARY S. BECKER
investmentcosts and would correspond signs of these correlationsmight even

to the definitionof net earnings used differ.6
throughoutthis paper, which subtracts Doubt has been cast on the frequent
all investmentcosts from"gross" earn- assertion that no allowance is made in
ings. Therefore,our departurewith this the income accounts fordepreciationon
definitionof earningsfromthe account- human capital.7 A depreciation-type
ing conventionsused fortransactionsin item is deducted, at least fromthe earn-
material goods-which separate income ings due to on-the-jobtraining,for the
from capital accounts to prevent a cost would be deducted duringthe train-
transaction in capital from ipso factor4 ing period. Depreciation on tangible
affectingthe income side is not capri- capital does not bulk so large in any one
cious but is groundedin a fundamental period because it is usually "writtenoff"
differencebetweentheway investmentin or depreciated during a period of time
materialand human capital are "written designed to approximate its economic
off."The underlyingcause of this differ- life. Hence human and tangible capital
ence undoubtedlyis the widespread re- appear to differmorein the timepattern
luctance to treat people as capital and of depreciation than in its existence,8
the accompanyingtendencyto treat all and the effecton wage income of a rapid
wage receiptsas earnings. "write-off"of human capital is what
Intermixingthe capital and income should oftenbe emphasized and studied.
accounts could make the reported "in- Our point can be put differently and
comes" oftraineesunusuallylow and per- more rigorously.The ideal depreciation
haps negative, even though their long- on a capital asset during any period
run or lifetimeincomes were well above would equal its change in value during
average. Since a considerablefractionof the period. In particular,if value rose, a
youngpersonsreceivesome training,and negative depreciation term would have
since traineeswould tend to have lower 6 A differencein signsis impossiblein Friedman's
currentand highersubsequent earnings analysis of consumerbehavior because he assumes
than other youth, the correlation be- that transitoryand long-run(that is, permanent)
(see his A Theoryof the
tween currentconsumptionand current incomes are uncorrelated
ConsumptionFunction[Princeton,N.J.: Princeton
earnings of young people' would not UniversityPress,1959]); we are suggestingthatthey
only be much weaker than the correla- may be negatively correlatedforyoungpersons.
I See, forexample,A. Marshall,PrinciplesofEco-
tion with long-run earnings, but the
nomics(8thed.; New York: MacmillanCo., 1949); C.
Christ,"Patinkin on Money, Interest,and Prices,"
4 Of course, Eshiftbetweenassets having differ- JournalofPolitical Economy,August,1957, p. 352;
ent productivitieswould affectthe income account and W. Hamburger,"The Relation of Consumption
on material goods even with currentaccounting to Wealthand the Wage Rate," Econometrica, Janu-
practices. ary, 1955.
I I say "young people" ratherthan "young fam- 8 In a recent paper, R. Goode has argued (see
ilies" because as J. Mincer has shown(in a paper to "Educational Expendituresand theIncome Tax," in
be publishedin a National Bureau of Economic Re- Selma J. Mushkin[ed.],EconomicsofHigherEduca-
search conferencevolume on labor economics),the tion [Washington: United States Department of
labor-forceparticipationof wives is positivelycor- Health, Education, and Welfare (forthcoming)])
relatedwiththe difference betweenhusbands' long- that educated personsshould be permittedto sub-
run and current income. Participation of wives, tract fromincomea depreciationallowance on tui-
therefore, makes the correlationbetweena family's tion payments.Such an allowanceis apparentlynot
currentand a husband's long-runincome greater required for on-the-jobtrainingcosts; indeed, one
than thatbetweena husband'scurrentand long-run mightargue,on the contrary,that too much or too
income. rapid depreciationis permittedon such investment.
INVESTMENT IN HUMAN CAPITAL: A THEORETICAL ANAILYSIS 15
to be subtractedor a positive apprecia- period and equal afterwards,they would

tion termadded to the income fromthe rise sharply at the end of the training
asset. Since trainingcosts would be de- periodand thenlevel off(as shownby the
ducted fromearningsduringthe training dashed line T'T' in Fig. 1), impartinga
period,the economic"value" of a trainee concave appearance to the curve as a
would at firstincrease rather than de- whole. In this extremecase an extreme
crease with age, and only later would it concavityappears; in less extremecases
begin to decrease.9 the principlewould be the same and the
Training has an important effecton concavitymore continuous.
the relation between earnings and age. Foregone earnings are an important,
Suppose that untrainedpersonsreceived althoughneglected,cost of much human
the same earnings regardlessof age, as capital and shouldbe treatedon the same
shown by the horizontal line UU in footingas directoutlays. Indeed, all costs
Figure 1. Trained personswould receive appear as foregoneearnings to workers
lowerearningsduringthe trainingperiod T
because training is paid for then, and
higherearningsat later ages because the
returnis collected then. The combined
effectof payingforand collectingthe re-
U
turn fromtrainingin this way would be zc/ I,_
to make the age earningscurveoftrained

persons, shown by TT in Figure 1,
steeper than that of untrainedpersons,
the differencebeing greater the greater AGE
the cost of, and returnfrom,the invest- FIG. 1
ment.
Not only does training make the receivingon-the-jobtraining;that is, all
curve steeper but, as indicated by costs appear as lowerearningsthan could
Figure 1, also more concave; that is, the be received elsewhere, although direct
rate of increase in earnings is affected outlays, C, may really be an important
moreat youngerthan at older ages. Sup- part of costs. The arbitrarinessof the
pose, to take an extremecase, that train- division between foregone and direct
ing raised the level of marginal produc- costs and the resulting advantage of
tivitybut had no effecton the slope, so treatingtotal costs as a whole" can be
that themarginalproductivityof trained 10 The equivalence between foregoneand direct
persons was also independentof age. If costsapplies to consumptionas wellas to investment
earningsequaled marginal product, TT decisions.A householdcan be assumedto maximizea
utilityfunction
would merelybe parallel to and higher
than UU, showingneitherslope nor con- U(K1, X 2, * X)
cavity. Since, however, earnings of X .i . X being consumptiongoods, subject to the
trained persons would be below mar- constraint
ginal productivityduring the training

P-ix=wV
(h - E lX1)?+Y
9 In my study forthe National Bureau of Eco-
nomic Research I try to measure the relationbe-
tween depreciationand age for several education wherepi is the marketprice of the ith good, I14the
classes. average wage rate, y non-wageincome,hIthe total
16 GARY S. BECKER
further demonstrated by contrasting trainingin a wide variety of skills and

school and on-the-jobtraining.Usually many-such as pilotingand machine re-
only the direct cost of school trainingis pair-are very usefulin the civilian sec-
emphasized, even though the foregone tor. Training is provided duringpart or
cost is sometimes(as with college educa- all ofthe firstenlistmentperiodand used
tion) an importantpart of the total. A duringthe remainderof the firstperiod
shiftof trainingfromschools to on the and hopefullyduringsubsequentperiods.
job would,however,reversethe emphasis This hope, however,is thwartedby the
and make all costs appear as foregone fact that re-enlistmentrates tend to be
earnings,even when direct outlays were inversely related to the amount of
important. civilian-type skills provided by the
Income maximizingfirmsin competi- military.11 Persons withthese skillsleave
tive labor markets would not pay the the militarymore readily because they
cost of general trainingand would pay can receive much higher wages in the
trained persons the market wage. If, civilian sector. Net military wages for
however,trainingcosts were paid, many those receivingtrainingare higherrela-
persons would seek training,few would tive to civilianwages duringthefirstthan
quit duringthe trainingperiod,and labor duringsubsequentenlistmentperiodsbe-
costs would be relatively high. Firms cause trainingcosts are largely paid by
that did not pay trained persons the the military.Not surprisingly, therefore,
marketwage would have difficulty satis- first-term enlistmentsforskilledjobs are
fyingtheirskill requirementsand would obtained much more easily than are re-
also tend to be less profitablethan other enlistments.
firms.Firms that both paid fortraining The militaryis a conspicuousexample
and less than the marketwage fortrained of an organization that both pays at
persons would have the worst of both least part of trainingcosts and does not
worlds,forthey would attract too many pay marketwages to skilledpersonnel.It
traineesand too fewtrainedpersons. has had, in consequence, relativelyeasy
These principles have been clearly access to "students" and heavy losses of
demonstratedduringthe last few years "graduates." Indeed, its graduates make
in discussions of problems in recruiting up the predominatepart of the supply in
military personnel. The military offers several civilian occupations. For ex-
ample, well over 90 per cent of United
numberofhoursavailable foreitherconsumptionor States commercialairlinepilots received
work,and hj the numberof hoursrequiredto con- much of their training in the armed
sume a unit of thejth good. By transposingterms forces.The military,of course, is not a
the constraintcan be writtenas
commercial organization judged by
2(p?+Whti))X =Wh+y . profitsand losses and has had no diffi-
The total cost or priceofconsuminga unitoftheith culty survivingand even thriving.
good is thesumoftwocomponents:the marketprice What about the old argument that
or directoutlayper unit,pi, and the foregoneearn-
ingsperunit,Whi. I expectto showin anotherpaper " See ManpowerManagementand Compensation
that this formulationof household decisions gives (Washington: GovernmentPrintingOffice,1957),
extremelyusefulinsightsintoa numberofimportant Vol. I, Chart 3, and the accompanyingdiscussion.
economicproblems,such as the choice betweenla- The militarynot onlywantsto eliminatethe inverse
bor and "leisure," the effectof price control on relationbut apparentlywould like to createa strong
prices,theroleofqueues,and thecause ofdifferences positiverelationbecause theyhave such a large in-
amongincomeclasses in priceelasticitiesofdemand. vestmentin heavily trainedpersonnel(see ibid.).
firmsin competitivelabor marketshave amount in firmsprovidingthe training

no incentiveto provide on-the-jobtrain- than in other firms.Training that in-
ing because trainedworkerswould be bid creases productivitymore in firmspro-
away by other firms?Firms that train viding it will be called specifictraining.
workersare supposed to impart external Completely specifictrainingcan be de-
economies to other firms because the finedas trainingthat has no effecton the
latter can use these workersfreeof any productivityof trainees that would be
training charge. An analogy with re- usefulin in otherfirms.Much on-the-job
search and developmentis often drawn training is neither completely specific
since a firmdeveloping a process that not completely general but increases
cannot be patented or kept secretwould productivitymore in firmsprovidingit
impart external economies to competi- and falls withinthe definitionof specific
tors."2This argumentand analogy would training.The rest increasesproductivity
apply if firmswere to pay trainingcosts, by at least as much in other firmsand
for they would suffera "capital loss" falls withina definitionof general train-
whenevertrainedworkerswere bid away ing. The previous section discussed gen-
by otherfirms.Firms can, however,shift eral training and this one will cover
trainingcosts to traineesand have an in- specifictraining. A few illustrationsof
centiveto do so when faced with compe- the scope of specific training are pre-
titionfortheirservices. sented before a formal analysis is de-
The difference between investmentin veloped.
training and in research and develop- The military offers some forms of
ment can be put very simply. Without trainingthat are extremelyusefulin the
patents or secrecy,firmsin competitive civilian sector,as already noted. Train-
industries cannot establish property ing is also offeredthat is only of minor
rightsin innovations,and these innova- use to civilians:astronauts,fighterpilots,
tions become fair game for all comers. and missile men all illustrate this to a
Patent systems try to establish these greater or lesser extent. Such training
rightsso that incentivescan be provided falls withinthe scope of specifictraining
to invest in research.Propertyrightsin because productivity is raised in the
skills,on the other hand, are automati- militarybut not (much) elsewhere.
cally vested, for a skill cannot be used Resources are usually spent by firms
without permissionof the person pos- in familiarizingnew employeeswiththeir
sessing it. This propertyright in skills organization, and the knowledge so
is the source of the incentiveto invest in acquired is a form of specific training
training and explains why an analogy because productivityis raised more in
withunowneq innovationsis misleading. the firmsacquiring the knowledgethan
2. Specific.-Completelygeneraltrain- in other firms. Other kinds of hiring
ing increases the marginal productivity costs, such as employmentagency fees,
of traineesby exactly the same amount the expensesincurredby new employees
in firmsprovidingthe trainingas in other in findingjobs (what Stigler calls in his
firms.Clearly some kinds of trainingin- paper in this Supplement the "costs of
crease productivity by a different 13 To judge by a sample of firmsrecentlyana-
lyzed,formalorientationcoursesare quite common,
12 These argumentscan be foundin Marshall,op. at least in large firms(see H. F. Clark and H. S.
cit., pp. 565-66, althoughhe compares trainingto Sloan, Classroomsin theFactories[New York: New
land-tenuresystems. York UniversityPress, 19551,chap. iv).
18 GARY S. BECKER
search"), or the time employedin inter- that come underthe rubricof specificin-
viewing,testing,checkingreferences, and vestment. This set is now treated ab-
in bookkeepingdo not so obviouslyraise stractlyin order that a general formal
the knowledge of new employees, but analysis can be developed. Empirical
theytoo are a formof specificinvestment situations are brought in again after
in human capital, althoughnot training. several major implicationsof the formal
They are an investmentbecause outlays analysis have been developed.
over a short period create distributed If all trainingwerecompletelyspecific,
effectson productivity;they are specific the wage that an employee could get
because productivityis raised primarily elsewherewould be independent of the
in the firmsmakingthe outlays; theyare amount of traininghe had received. One
in human capital because theylose their might plausibly argue, then, that the
value wheneveremployeesleave. In the wage paid by firmswould also be inde-
restof this sectionI usually referonly to pendent of training. If so, firmswould
on-the-jobspecifictrainingeven though have to pay training costs, for no ra-
the analysis applies to all on-the-job tional employee would pay for training
specificinvestment. that did not benefithim. Firms would
Even after hiringcosts are incurred, collect the returnfromsuch trainingin
firmsusuallyknowonlya limitedamount the formof largerprofitsresultingfrom
about the ability and potential of new higherproductivity,and trainingwould
employees. They try to increase their be provided whenever the return-dis-
knowledge in various ways-testing, counted at an appropriate rate-was at
rotation among departments,trial and least as large as the cost. Long-run
error,etc.-for greater knowledge per- competitiveequilibriumrequiresthat the
mits a more efficient utilizationof man- present value of the return exactly
power.Expenditureson acquiringknowl- equals costs.
edge of employee talents would be a These propositionscan be stated more
specific investment if the knowledge formallywith the equations developed
could be kept fromotherfirms,forthen earlier. Accordingto equations (5) and
productivitywould be raised morein the (7) the equilibriumof a firmproviding
firmsmakingthe expendituresthan else- trainingin competitivemarkets can be
where. writtenas
The effectof investmentin employees
on theirproductivityelsewheredepends
on market conditionsas well as on the + G[E =
0~ +0-t ( 11)
nature of the investment.Very strong = lvo+C
monopsonistsmightbe completelyinsu-
lated from competitionby other firms, whereC is the cost of traininggiven only
and practically all investmentsin their in the initial period, MPo is the oppor-
labor force would be specific. On the tunitymarginalproduct of trainees, Wo
other hand, firmsin extremelycompeti- is the wage paid to trainees, and Wt
tive labor marketswould face a constant and MPt are the wage and marginal
threat of raiding and would have fewer product in period t. If the analysis of
specificinvestmentsavailable. completelyspecifictraininggiven in the
These examples convey some of the preceding paragraph was correct, W
surprisinglylarge variety of situations would always equal the wage that could
be receivedelsewhere,MPt - Wt would paid for specific trainingwould be un-

be the fullreturnin t fromtraininggiven able to collect any furtherreturn and
in 0, and G would be the present value would also suffera capital loss. The
of thesereturns.Since MPo measuresthe willingnessof workersor firmsto pay for
marginal product elsewhere and WO specifictrainingshould,therefore, closely
would measure the wage elsewhere of depend on the likelihood of labor turn-
trainees,MP' = Wo. As a consequence over.
G = C, or,in fullequilibrium,the return To bringin turnoverat thispointmay
fromtrainingequals costs. seem like a deus ex machinesince it is al-
Before claimingthat the usual equal- most always ignored in traditional
ity betweenmarginalproductand wages theory.In the usual analysis of competi-
holds when completelyspecifictraining tive firms,wages equal marginal prod-
is considered,the reader should bear in uct, and since wages and marginal
mind two points. The firstis that the product are assumed to be the same in
equality between wages and marginal many firms,no one suffersfrom turn-
productin the initialperiod involves op- over. It would not matter whether a
portunity,not actual marginal product. firm'slabor force always contained the
Wages would be greater than actual same persons or a rapidly changing
marginal product if some productivity group.Any personleaving one firmcould
was foregoneas part of the trainingpro- do equally well in other firms,and his
gram. The second is that, even if wages employercould replace him withoutany
equaled marginalproduct initially,they change in profits.In other words, turn-
would be less in the futurebecause the over is ignoredin traditionaltheorybe-
differences between future marginal cause it plays no importantrole within
productsand wages constitutethe return the frameworkof the theory.
to trainingand are collectedby the firm. Turnover becomes important when
All ofthisfollowsfromthe assumption costs are imposed on workersor firms,
that firmspay all costs and collect all whichare preciselythe effectsof specific
returns.But could not one equally well training. Suppose a firm paid all the
argue that workerspay all specifictrain- specifictrainingcosts of a worker who
ing costs by receiving appropriately quit aftercompletingit. Accordingto our
lower wages initiallyand collect all re- earlier analysis he would have been re-
turns by receivingwages equal to mar- ceivingthe marketwage and a new em-
ginal productlater? In termsof equation ployee could be hired at the same wage.
(11), Wtwould equal MPt, G would equal If the new employee were not given
zero, and Wo=MP'-C, just as with training,his marginal product would be
general training. Is it more plausible less than that of the one who quit since
that firmsrather than workerspay for presumably training raised the latter's
and collectand returnfromtraining? productivity. Training could raise the
An answer can be foundby reasoning new employee's productivitybut would
along the followinglines. If a firmhad require additional expendituresby the
paid forthe specifictrainingof a worker firm.In otherwords,a firmis hurtby the
who quit to take anotherjob, its capital departureof a trainedemployeebecause
expenditurewould be partly wasted, for an equally profitable new employee
no furtherreturn could be collected. could not be obtained. In the same way
Likewise, a worker fired after he had an employeewho pays forspecifictrain-
20 GARY S. BECKER
ing would suffera loss frombeinglaid off crease. Such trainingcan be looked upon
because he could not find an equally as the sum of two components,one com-
good job elsewhere. To bring turnover pletelygeneral,the othercompletelyspe-
into the analysis of specifictraining is cific, with the formerbeing relatively
not, therefore,a deus ex machine but is larger the greater the effecton wages
made necessary by the important link in other firmsrelative to the firmspro-
betweenthem. viding the training. Since firmsdo not
Firms paying for specific training pay any of completelygeneral costs and
might take account of turnovermerely onlypart of completelyspecificcosts,the
by obtaining a sufficiently large return fractionof costs paid by firmswould be
from those remaining to counterbal- negativelyrelated to the importanceof
ance the loss fromthoseleaving. (The re- the general component,or positivelyre-
turn on "successes"-those remaining- lated to the specificityof the training.
would, of course,overestimatethe aver- Our conclusionscan be stated formal-
age returnon all trainingexpenditures.) ly in terms of the equations developed
Firms could do even better,however,by earlier.If G is the presentvalue of the re-
recognizingthat the likelihoodof a quit turnfromtrainingcollectedby firms,the
is not fixedbut depends on wages. In- fundamentalequation is
stead of merely recouping on successes
MP' + G = W + C. (12)
what is lost on failures,they mightre-
duce the likelihood of failure itself by If G' measures the return collected by
offering higherwages aftertrainingthan employees,the total return,G", would
could be received elsewhere. In effect, be the sum of G and G'. In full equi-
they would offeremployeessome of the libriumthetotal returnwould equal total
returnfromtraining.Matters would be costs, or G" = C. Let a representthe
improvedin some respectsbut worsened fractionof the total returncollected by
in others, for the higher wage would firms.Since G = aG" and G" = C, equa-
make the supply of traineesgreaterthan tion (12) can be writtenas
the demand, and rationingwould be re-
quired. The final step would be to shift 14 Marshall was clearly aware of specifictalents
some trainingcosts as well as returnsto and theireffecton wages and productivity:"Thus

the head clerk in a business has an acquaintance
employees,therebybringingsupplymore with men and things,the use of whichhe could in
in line withdemand. When the finalstep some cases sell at a highprice to rival firms.But in
is completed firms no longer pay all othercases it is ofa kindto be ofno value save to the
businessin whichhe already is; and thenhis depar-
trainingcosts nor do they collect all the turewouldperhapsinjureit byseveraltimesthevalue
return but they share both with em- of his salary, while probablyhe could not get half
that salaryelsewhere"(op. cit.,p. 626). (My italics.)
ployees."4The shares of each depend on However, he overstressedthe element of indeter-
the relation between quit rates and minacy in these wages ("their earningsare deter-
wages, layoffrates and profits,and on mined... by a bargainbetweenthemand theirem-
otherfactorsnot discussed here,such as ployers, the terms of which are theoreticallyar-
bitrary"[ibid.,fn.]) because he ignoredthe effectof
the cost of funds,attitudes toward risk, wages on turnover.
and desiresforliquidity.'5 15 The rate used to discountcosts and returnsis
If trainingwere not completelyspe- the sum of a (positive) rate measuringthe cost of

cific,productivitywould increasein other funds,a (positive or negative) riskpremium,and a
liquiditypremiumthat is presumablypositivesince
firmsas well, and the wage that could capital investedin specifictrainingis very illiquid
be received elsewhere would also in- (see the discussionin Sec. IV, C).
MP'+ aC = W + C, (13) of such trainingis borne entirelyby em-

or ployees. Firms are concernedabout the
I == P'- (1 - a)C.16 (14) turnover of employees with specific
training,and a premiumis offeredto re-
Employees pay the same fraction of
duce their turnover because firmspay
costs, 1 - a, as they collect in returns,
part of theirtrainingcosts.
which generalizes the results obtained
The part of specifictrainingpaid by
earlier. For if trainingwere completely
employees has effectssimilar to those
general, a = o, and equation (14) re-
discussed earlier for general training:it
duces to equation (10); if firmscollected
is also paid by a reductionin wages dur-
all the returnfromtraining,a = 1, and
ing the trainingperiod, tends to make
(14) reduces to MP' = Wo; if 0 < a <
age-earningsprofilessteeper and more
1, none of the earlierequations are satis-
concave, etc. The part paid by firmshas
factory.
none of these implications,since current
A few major implications of this
or futurewages would not be affected.
analysis of specific training are now
Specific,unlikegeneral,trainingwould
developed.
produce certain "external" effects,for
Rational firmspay generally trained
quits would preventfirmsfromcapturing
employeesthe same wage and specifically
the fullreturnon costspaid by them,and
trained employees a higher wage than
layoffswould do the same to employees.
theycould get elsewhere.A readermight
Note, however, that these are external
easily believe the contrary,namely,that
diseconomiesimposed on the employees
generaltrainingwould commanda higher
or employersoffirmsprovidingthe train-
wage relativeto alternativesthan specific
ing, not external economies accruing to
trainingdoes, since,afterall, competition
other firms.
for persons with the latter is apt to be
Employees with specifictraininghave
weaker than for those with the former.
less incentiveto quit, and firmshave less
This view, however, overlooks the fact
incentive to firethem, than employees
that general training raises the wages
with no or general training,which im-
that could be received elsewhere while
plies that quit and layoffrates would be
(completely) specifictrainingdoes not,
inversely related to the amount of
so a comparisonwith alternativewages
specifictraining.Turnoverwould be least
gives a misleading impression of the
for employees with extremely specific
absoluteeffecton wages of differenttypes
training and most for those receiving
of training.Moreover, firmsare not too
such general trainingthat productivity
concerned about the turnover of em-
was raised less in firmsproviding the
ployees with general trainingand have
trainingthan elsewhere.These proposi-
no incentive to offerthem a premium
tions are as applicable to the large
above wages elsewherebecause the cost
amount of irregular quits and layoffs
16 If G" did not equal C, theseequationswouldbe that continually occur as to the more
slightlymore complicated. Suppose, for example, regular cyclical and secular movements
G" = G + G' = C +-n n > 0 so that the present
value ofthe total returnwould be greaterthan total in turnover; in this section, however,
costs. Then G = aG" = aC + an, and only the more regular movements are
MIP'+ aC+ an = W+C, discussed.
or Consider a firmthat experiencesan
W = AP'- [ (1-a )C-anl]. unexpected decline in demand for its
22 GARY S. BECKER
output, the rest of the economy being trainingmight be lost forever. If spe-
unaffected. The marginal product of cificallytrained workers were not laid
employees without specific training- off, the firm would lose now because
such as untrained or generally trained marginal product would be less than
employees presumablyinitiallyequaled wages but would gain in the futureifthe
wages, and their employmentwould be decline in demand proved temporary.
reduced to prevent their marginal pro- There is an incentive,therefore,not to
ductivityfromfallingbelow wages. The lay off workers with specific training
marginal product of specificallytrained when their marginal product is only
employees initially would have been temporarilybelow wages, and the larger
greaterthan wages. A declinein demand a firm'sinvestmentthe greater the in-
would reduce these marginal products centivenot to lay offsuch workers.
too, but as long as theywere reducedby A workercollectingsome of the return
less thanthe initialdifference withwages, fromspecifictrainingwould have less in-
firmshave no incentive to lay offsuch centive to find a new job when tempo-
employees.For sunk costs are sunk,and rarilylaid offthan otherswould: he does
thereis no incentiveto lay offemployees not want to lose his investment.His be-
whose marginal product is greaterthan havior while laid offin turn affectshis
wages, no matter how unwise it was, in chances of being laid off,for if it were
retrospect,to invest in their training. known that he would not readily take
Thus workerswith specifictrainingseem another job, the firmcould lay him off
less likelyto be laid offas a consequence without much fear of losing its invest-
ofa declinein demandthan are untrained ment.
or even generallytrainedworkers.'7 The conclusion here can be briefly
If the decline in demand were suf- summarized. When one firmalone ex-
ficientlygreat so that even the marginal periences an unexpected decline in de-
product of specificallytrained workers mand, relativelyfew workerswith spe-
was pushed below wages, would the firm cific trainingwould be laid off,if only
just proceed to lay them off until the because their marginal product were
marginal product was brought into initiallygreaterthantheirwage. If thede-
equalitywithwages? To show the danger cline were permanent,all workerswould
here,assume that all the cost and return be laid offwhen theirmarginal product
fromspecifictrainingwas paid and col- became less than theirwage and all those
lected by the firm.Any workerlaid off laid off would have to find jobs else-
would tryto finda new job, sincenothing where. If the decline were temporary,
would bind him to the old one.'8 The specificallytrainedworkersmightnot be
firmmight be hurt if a new job was laid off even though their marginal
found, for the firm'sinvestmentin his product were less than their wage be-
cause the firmwould sufferif they took
A verysimilarargumentis developedby Wal- otherjobs. The likelihoodof theirtaking
17
ter Oi in "Labor as a Quasi-fixedFactor of Produc-

tion" (unpublishedPh.D. dissertation,Universityof other jobs would be inversely related,
Chicago). and thereforethe likelihood of their
18 Actually one need only assume that the quit beinglaid offwould be positivelyrelated,
rate of laid-offworkerstends to be significantly to the extentof theirown investmentin
greaterthan that of employedworkers,if only be-
cause the cost ofsearchingforanotherjob is less for
training.
laid-offworkers. The analysis can easily be extendedto
cover general declines in demand; sup- -often an extremelypowerfulone not

pose, forexample, a general cyclical de- to quit. At the same time pension plans
clineoccurred.Let me assume that wages "insure" firmsagainst quits forthey are
are stickyand remainat the initiallevel. given a lump sum-the non-vestedpor-
If the decline in business activity were tion of payments-whenever a worker
not sufficientto reduce the marginal quits. Insuranceis needed forspecifically
product below the wage, workerswith trainedemployeesbecause theirturnover
specifictraining would not be laid off would impose capital losses on firms.
even thoughotherswould be, just as be- Firms can discouragesuch quits by shar-
fore. If the decline reduced marginal ing training costs and the returnwith
productbelow wages, only one modifica- employees,but they have less need to
tion in the previous analysis is required. discourage them and would be more
A firmwould have a greaterincentiveto willingto pay fortrainingcosts if insur-
lay offspecificallytrained workersthan ance was provided.The effectson the in-
when it alone experiencesa decline be- centiveto investin one's employeesmay
cause laid-offworkerswould be less likely have been a major stimulus to the de-
to find other jobs when unemployment velopmentof pension plans.20
was widespread. In other respects the An effectivelong-termcontractwould
implications of a general decline with insure firmsagainst quits, just as pen-
wage rigidityare the same as those of a sions do, and also insure employees
declinein one firmalone. against layoffs. Firms would be more
The discussion has concentrated on willingto pay forall kinds of training-
layoffrates,but the same kind of reason- assumingfuturewages were set at an ap-
ing shows that a rise in wages elsewhere propriate level-since a contract, in
would cause fewerquits amongspecifical- effect,converts all training into com-
ly trained workersthan among others. pletelyspecifictraining.A casual reading
For specificallytrained workersinitially of historysuggests that long-termcon-
receive higher wages than are available tracts have, indeed, primarily been a
elsewhere and the wage rise elsewhere means of inducing firmsto undertake
would have to be greaterthan the initial large investmentsin employees. These
differencebefore they would consider contractsare seldom used today in the
quitting.Thus both the quit and layoff United States,2'and while they have de-
rate of specificallytrainedworkerswould clined in importance over time, they
be relativelylow and fluctuaterelatively were probablyalways the exceptionhere
less duringbusinesscycles.These are im- largely because courts have considered
portant implicationsthan can be tested them a form of involuntaryservitude.
with the data available.
Although quits and layoffsare influ- 19Accordingto the National Bureau ofEconomic
Researchstudyofpensions,mostplans stillhave in-
enced by considerationsother than in- completevesting(see D. Holland's reportin A Re-
vestmentcosts,some ofthese,such as the spectfor Facts: National Bureau of Economic Re-
presence of pension plans, are more searchAnnual Report[New York: National Bureau
of Economic Research, 1960],pp. 44-46).
stronglyrelatedto investmentsthan may
20 In recentyearspensionshave also been an im-
appear at firstblush. A pension plan
portanttax-savingdevice,whichcertainlyhas been
with incomplete vesting privileges'9 a crucialfactorin theirmushrooming growth.
penalizes employees quitting before re- industryare
21 The militaryand entertainment
tirementand thus provides an incentive the major exceptions.
24 GARY S. BECKER
Moreover,any enforciblecontractcould training.The investmentapproach pro-

at best specifythe hours required on a vides a very differentinterpretationof
job, not the quality of performance. some commonphenomena,as can be seen
Since performancecan vary widely, un- fromthe followingexamples.
happy workerscould usually "sabotage" A positive differencebetween mar-
operationsto induce employersto release ginal product and wages is usually said
them fromcontracts. to be evidenceof monopsonypower,and
Some trainingmay be useful neither just as the ratio of product price to
in most nor only in a singlefirmbut in a marginal cost has been suggested as a
set of firmsdefinedby product,type of measure of monopolypower, so has the
work, or geographicallocation. For ex- ratio of marginalproduct to wages been
ample, carpentry training would raise suggested as a measure of monopsony
productivityprimarilyin the construc- power. But specifictrainingwould also
tion industry,and French legal training make this ratio greater than one. Does
would be ineffectivein the United States, the differencebetween the marginal
with its differentlanguage and legal product and the earnings of major-
institutions.Such training would tend league baseball players, for example,
to be paid by trainees,since a singlefirm measuremonopsonypower or the return
could not readilycollectthe return,22and on a team's investment?Since teams do
in this respectwould be the same as gen- spend a greatdeal on developingplayers,
eral training.In one respect,however,it some and perhaps most of the difference
is similar to specifictraining. Workers must be considereda returnon invest-
with training"specific" to an industry, ment even were there no uncertainty
occupation, or countryare less likely to about the abilities of differentplayers.23
leave that industry,occupation,or coun- Earnings might differgreatly among
try (via migration)than other workers, firms,industries,and countriesand yet
so their industrial, occupational, or there may be relatively little worker
country"turnover" would be less than mobility. The usual explanation would
average. The same resultis obtained for be that workerswere eitherirrationalor
specific training, except that a firm faced with formidableobstacles in mov-
ratherthan an industry,occupation, or ing. However, if specific24 trainingwere
countryis used as the unit of observa- important,differences in earningswould
tion in measuringturnover.An analysis be a misleading estimate of what "mi-
of specifictraining,therefore,is helpful grants" could receive, and it might be
also in understandingthe effectsof cer- perfectlyrational not to move. For ex-
tain types of "general" training. ample, althoughFrenchlawyersearn less
Althougha discrepancybetweenmar- than American lawyers, the average
ginal product and wages is frequently Frenchlawyercould not earnthe average
taken as evidenceof imperfections in the Americanlegal incomesimplyby migrat-
competitivesystem,it would occur even 23 S. Rottenberg("The Baseball Players' Labor
in a perfectlycompetitiveenvironment Market," JournalofPolitical Economy,June,1956,

where there is investment in specific p. 254) arguesthatthestrongrestrictions on entryof
teams intothe major leagues is primafacieevidence
22 Sometimesfirmsco-operatein paying training that monopsony poweris important,but theentryor
costs, especially when trainingapprentices(see A threatof new leagues,such as have occurredin pro-
Look at IndustrialTrainingin MercerCounty,N.J. fessionalbasketballand football,is a real possibility.
[WashingtonBureau of Apprenticeshipand Train- 24 Specific,that is, to the firms,industries,or
ing, 19591,p. 3). countriesin question.
ing to the United States, for he would offerstraining in conjunction with the
have to invest in learning English and productionof goods. Some schools, like
Americanlaw and procedures.25 those forbarbers,specialize in one skill,
In extremetypes of monopsony, ex- while others, like universities,offera
emplifiedby an isolated company town, large and diverse set. Schools and firms
job alternativesforboth trainedand un- are oftensubstitutesourcesof particular
trainedworkersare nil, and all training, skills. The shiftthat has occurred over
no matter what the nature, would be time in both law and engineeringis a
specificto the firm. Monopsony com- measure of this substitution.In acquir-
bined with control of a product or an ing legal skills the shifthas been from
occupation (due, say, to anti-pirating apprenticeships in law firms to law
agreements)convertstrainingspecificto schools, and in engineeringskills from
that product or occupation into firm- on-the-job experience to engineering
specifictraining.These kinds of monop- schools.27
sony increase the importanceof specific Some types of knowledge can be
trainingand thus the inventiveto invest masteredbetterifsimultaneouslyrelated
in employees.26The effecton trainingof to a practical problem; others require
less extreme monopsony positions is prolonged specialization. That is, there
more difficultto assess. Consider the are complementaritiesbetween learning
monopsonistwho pays his workersthe and workand betweenlearningand time.
best wage available elsewhere.I see no Most trainingin the constructionindus-
reason why training should have a try is apparentlystill best given on the
systematically differenteffect on the job, while the trainingof physicistsre-
foregoneearningsof his employeesthan quires a long period of specialized effort.
of those in competitivefirmsand, there- The development of certain skills re-
fore, no reason why specific training quires both specializationand experience
should be more (or less) important to and can be had partly fromfirmsand
him. But monopsonypower as a whole, partly from schools. Physicians receive
including the more extrememanifesta- apprenticeshiptraining as interns and
tions, would appear to increase the im- residentsafter several years of concen-
portance of specifictrainingand the in- trated instructionin medical schools. Or
centive for firms to invest in human to take an example closerto home, a re-
capital. search economistnot only spends many
yearsin schoolbut also a ratherextensive
B. SCHOOLING
apprenticeshipin masteringthe "art" of
A school can be definedas an institu- empirical and theoreticalresearch. The
tion specializing in the production of complementaritywith firmsand schools
training,as distinct from a firm that dependsin part on the amount offormal-
25 Ofcourse,personswhohave notyetinvestedin ized
knowledge available- price theory
themselveswouldhave an incentiveto migrate,and can be formallypresented in a course,
this partly explains why young persons migrate whilea formalstatementofthe principles
morethan older ones. For a furtherexplanationsee
my discussionon p. 38; also see the paper in this 27 State occupationallicensing often
requirements
Supplementby L. Sjaastad. permit on-the-job training to be substituted for
betweenmarginal school training(see S. Rottenberg,"The Economics
26 A relativelylarge difference
productand wages in monopsoniesmightmeasure, of OccupationalLicensing" [paper givenat the Na-

therefore,the combined effectof economic power tional Bureau of Economic Research Conferenceon
and a relativelylargeinvestmentin employees. Labor Economics,April,1960]).
26 GARY S. BECKER
used in gatheringand handlingempirical haps this is most apparent when a stu-

materialsis lacking. dent worksin an enterprisecontrolledby
Training in a new industrial skill is his school, which frequentlyoccurs at
usually firstgiven on the job, since firms many colleges.
tend to be the firstto be aware of its Our definitionof studentnet earnings
value, but as demand develops, some of may seem strangesince tuitionand other
the training shifts to schools. For ex- direct costs are not usually subtracted
ample, engineeringskills were initially from "gross" earnings. Note, however,
acquired on the job, and over time that indirectschool costs are implicitly
engineeringschoolshave been developed. subtracted,forotherwiseearningswould
A studentdoes not work forpay while have to be definedas the sum ofobserved
in school but may do so "after" or "be- and foregoine earnings, and foregone
fore" school, or during"vacations." His earningsare a major cost of high school,
earningsare usually less than if he were college, and adult schooling. Moreover,
not in school since he cannot work as earningsof on-the-jobtraineeswould be
much or as regularly.The difference be- net of all their costs, including direct
tween what could have been and is "tuition' costs. Consistent accounting,
earned is an importantand indirectcost which is particularly important when
of schooling. Tuition, fees, books and comparingearningsof personstrainedin
supplies, unusual transportation and schooland on the job, would requirethat
lodging expenses are other,more direct, earnings of students be defined in the
costs. Net earningscan be definedas the same way.28
differencebetween actual earnings and Regardless of whether all costs or
directschool costs. In symbols, merely indirect costs are subtracted
frompotentialearnings,schoolingwould
WT= MP-k, (15)
have the same kind of implications as
where MP is actual marginal product generalon-the-jobtraining.Thus school-
(assumed equal to earnings)and k is di- ing would steepen the age-earningspro-
rectcosts.If MPo is themarginalproduct file,mix togetherthe incomeand capital
that could have been received,equation accounts, introduce a negative relative
(15) can be writtenas between the permanent and current
earnings of young persons, and allow
W = MPo - (MPo - MP + k) fordepreciationon human capital. This
(16)
= MPO-C
-
supports our earlier assertion that an
analysis of on-the-jobtrainingleads to
whereC is the sum ofdirectand foregone generalresultsthat apply to otherkinds
costs and where net earnings are the of investmentin human capital as well.
differencebetween potential earnings C. OTHER KNOWLEDGE
and total costs. These relationsshouldbe
On-the-joband school trainingare not
familiarsince they are the same as those
the only activitiesthat raise real income
derived for general on-the-jobtraining,
primarilyby increasing the knowledge
which suggests that a sharp distinction
at a person's command. Information
between schools and firmsis not always
28 Studentsoftenhave negativenet earningsand
necessary:forsome purposesschools can
in this respectdifferfrommost on-the-jobtrainees,
be treated as a special kind of firmand although at one time many apprenticesalso had
studentsas a special kind of trainee.Per- negativeearnings.
about the prices charged by different that the direct costs of search, like the
sellerswould enable a personto buy from direct costs of schooling, are usually
the cheapest, thereby raising his com- added to consumptionrather than de-
mand over resources, or information ducted fromearnings.If firmspaid costs
about the wages offeredby different and collected the return,search would
firmswould enable him to work forthe have the same implicationsas on-the-job
firm paying the highest (see Stigler's specifictraining.
paper in this Supplement,pp. 94-105). Whether workers or firms pay for
In both examples informationabout the search depends on the effectof a job
economic system, of consumption and change on alternatives: the larger the
production possibilities,is increased as number of alternatives made available
distinctfromknowledge of a particular by a change,the larger,not the smaller,
skill. Informationabout the political or the fractionof costs that have to be paid
social system-the effect of different by workers. Consider a few examples.
parties or social arrangements-could Immigrantsto the United States usually
raise real incomes.29
also significantly found many firmsthat could use their
Let us considerin more detail invest- talents,and thesefirmsshould have been
ment in informationabout employment reluctantto pay the large cost of trans-
opportunities. A better job might be portingworkersto the United States. In
found by spending money on employ- fact, immigrantsalmost always had to
ment agencies and situation-wantedads, pay theirown way. Even the system of
using one's time to examine want ads, contractlabor, which we have seen is a
talkingto friendsand visitingfirms,or in means of protectingfirmsagainst turn-
Stigler'slanguage by "search." When the over, was singularlyunsuccessfulin the
newjob requiresgeographicalmovement, United States and has been infrequently
additional time and resourceswould be used.3" Firms that are relatively insu-
spent in moving.30These expenditures lated from competition in the labor
constitutean investmentin information markethave an incentiveto pay thecosts
about job opportunitiesthat would yield of workerscomingfromelsewheresince
a returnin the formof higherearnings they have little to worry about in the
thanwould otherwisehave been received. way of competingneighboringfirms.In
If workerspaid costs and collected the addition,firmswould be willingpartlyto
return,an investmentin search would pay forsearchwithina geographicalarea
have the same implicationsabout age- because some costs-such as an employ-
earningsprofiles,depreciation,and the ment agency's fee-would be specificto
like as general on-the-job trainingand the firmdoingthe hiringsince theymust
schooling, although it must be noted be repeated at each job change.
29 The role of political knowledgeis systemati-
D. PRODUCTIVE WAGE INCREASES
cally discussedin A. Downs, An EconomicTheoryof
Democracy(New York: Harper & Bros., 1957), and One way to invest in human capital
morebrieflyin my "Competitionand Democracy,"
Journalof Law and Economics,Vol. I (Fall, 1958). is to improve emotional and physical
30 Studiesof largegeographicalmoves-those re- health. In Westerncountriestoday earn-
quiringbotha changein employmentand consump-
tion-have tendedto emphasizethejob changemore 31 For a carefuldiscussionof the contract-labor
than the consumptionchange. Presumablymoney systemsee C. Erickson,AmericanIndustryand the
wagesare consideredto be moredispersedgeographi- EuropeanImmigrant, 1860-1885(Cambridge,Mass.:
cally than prices. Harvard UniversityPress, 1957).
28 GARY S. BECKER
ings are much more closely geared to ductive, some on-the-job investments
knowledge than to strength,but in an would not be undertaken even though
earlierday, and elsewherestill, strength theywereveryproductiveby "absolute"
had a significantinfluenceon earnings. standards.
Moreover,emotionalhealth increasingly Before I proceed further,one point
is consideredan importantdeterminant needs to be made. The amount invested
of earnings in all parts of the world. outside the job would be related to cur-
Health, like knowledge,can be improved rent earningsonly if the capital market
in manyways. A declinein the death rate was very imperfect,for otherwise any
at working ages may improve earning amount of "outside" investmentcould
prospectsby extendingthe periodduring be financed with borrowed funds. The
whichearningsare received;a betterdiet analysis assumes, therefore,that the
adds strength and stamina, and thus capital market is extremelyimperfect,
earning capacity; or an improvementin earnings and other income being a
workingconditions-higherwages, coffee major source of funds.32
breaks, and so on-might affectmorale A firmwould be willingto pay forin-
and productivity. vestmentin human capital made by em-
Firms can invest in the health of employees outside the firmif it could bene-
ployees through medical examinations, fitfromthe resultingincreasein produc-
luncheons,or steeringthem away from tivity. The only way to pay, however,
activities with high accident and death would be to offerhigher wages during
rates. An investmentin health that in- the investmentperiod than would have
creased productivityto the same extent been offeredsince directloans to employ-
in many firmswould be a general in- ees are prohibitedby assumption.When
vestmentand would have the same effect a firmgives a productivewage increase-
as general training,while an investment that is, an increasethat raises productiv-
in health that increased productivity ity-"outside" investments are, as it
more in the firmsmakingthemwould be were, converted into on-the-job invest-
a specific investment and would have ments. Indeed, such a conversion is a
the same effectas specifictraining. Of natural way to circumventimperfections
course,most investmentsin healthin the in the capital market and the resultant
United States are made outside firms, dependence of the amount invested in
in households, hospitals, and medical human capital on the level of wages.
offices.A full analysis of the effecton The discussion can be stated more
earningsof such "outside" investmentin formally.Let W representwages in the
health is beyond the scope of this paper, absence of any investment,and let a
but I would like to discuss a relationbe- productive wage increase costing an
tween on-the-joband "outside" human amount C be the only on-the-jobinvest-
investmentsthat has receivedmuch at- ment. Total costs to the firmwould be
tentionin recentyears. 7r= W + C, and since the investment
When on-the-jobinvestmentsare paid cost is received by employees as higher
by reducingearningsduringthe invest- wages, 7rwould also measuretotal wages.
ment period, less is available forinvest- The cost of on-the-job training is not
ments outside the job in health, better
32Imperfections in the capital market with re-
diet,schooling,and otherfactors.If these spect to investmentin human capital are discussed
"outside" investmentswere more pro- in Sec. IV, D.
receivedas higherwages, so thisformally store or truck systemin nineteenth-cen-

distinguishesa productivewage increase tury Great Britain has been interpreted
fromother on-the-jobinvestments.The as partly designed to prevent an exces-
term MP can represent the marginal sive consumption of liquor and other
product of employeeswhen wages equal debilitatingcommodities.35The preva-
W, and G the gain to firmsfromthe in- lence of employerpaternalismin under-
vestmentin higherwages. In full equi- developed countrieshas been frequently
librium, accepted as evidence of a differencein
MP + G = W + C=r. (17) temperamentbetween East and West.
An alternative interpretationsuggested
Investmentwould not occur if the firm's by our study is that an increase in con-
gain was nil (G = o), forthentotal wages sumptionhas a greatereffecton produc-
(r) would equal the marginal product tivity in underdevelopedcountries,and
(MP) when thereis no investment. that a productivityadvance raisesprofits
We have shownthat firmswould bene- more there either because firms have
fitmore fromon-the-jobinvestmentthe more monopsonypower or because the
more specificthe productivityeffect,the advance is less delayed. In other words
greatertheirmonopsonypower, and the "paternalism" may simply be a way of
longerthe labor contract;conversely,the investing in the health and welfare of
benefitwould be less the more general employeesin underdevelopedcountries.
the productivityeffect,the less their An investment in human capital
monopsonypower, and the shorterthe would usually steepen age-earningspro-
labor contract. For example, a wage in- files,loweringreportedearnings during
crease spent on a betterdiet with an im- the investmentperiod and raisingthem
mediate impact on productivitymight later on. But an investmentin an in-
well be granted,33but not one spent on crease in earningsmay have preciselythe
general education with a very delayed opposite effect,raisingreportedearnings
impact-." more duringthe investmentperiod than
The effectof a wage increase on pro- later and thus flattening age-earning
ductivitydepends on the way it is spent,
31 Marshall discusses delays of a generationor
whichin turn depends on tastes, knowl- moreand notesthat profit-maximizing firmsin com-
edge, and opportunities. Firms might petitiveindustrieshave no incentiveto grant such
exertan influenceon spendingby exhort- wage increases.
"Again, in payinghis workpeoplehighwages and
ing employees to consume good food, in caringfortheirhappinessand culture,the liberal
housing,and medical care, or even by re- employerconfersbenefitswhichdo not end withhis
quiring purchases of specifieditems in own generation.For the childrenof his workpeople
share in them,and growup strongerin body and in
company stores. Indeed, the company characterthan otherwisetheywouldhave done. The
33 The morerapid theimpactthe morelikelythat
price whichhe has paid forlabour will have borne
it comeswithinthe (formalor de facto) contractpe- the expensesofproductionofan increasedsupplyof
riod.Leibensteinapparentlyinitiallyassumeda rap- high industrialfacilitiesin the next generation:but
id impactwhen discussingwage increasesin under- these facilitieswill be the propertyof others,who
willhave the rightto hirethemout forthe best price
developedcountries(see his "The Theoryof Under-
employmentin Backward Economies," Journal of they will fetch: neitherhe nor even his heirs can
PoliticalEconomy,Vol. LXV [April,1957]). In a later reckon on reaping much material reward for this
commenthe argued that the impact mightbe de- part of the good that he has done" (op. cit.,p. 566).
layed ("Underemployment in BackwardEconomies: 35 See G. W. Hilton, "The BritishTruck System
Some AdditionalNotes," JournalofPolitical Econ- in the Nineteenth Century," Journal of Political
omny, Vol. LXVI [June,1958]). Economy,LXV (April, 1957), 246-47.
30 GARY S. BECKER
profiles.The cause of this differenceis III. RELATION BETWEEN EARNINGS,

simplythat reportedearningsduringthe COSTS, AND RATES OF RETURN
investmentperiod tend to be net of the Thus farlittleattentionhas been paid
cost of generalinvestmentsand gross of to the factorsdeterminingthe amountin-
the cost of a productive earnings invested in human capital. The most im-
crease.36 portant single determinantis the profit-
The productivity of employees de- abilityor rate of return,but the effecton
pends not only on their ability and the earningsof a change in the rate of return
amountinvestedin themboth on and off has been difficultto distinguish em-
the job but also on theirmotivation,or piricallyfroma changein the amount in-
the intensityof their work. Economists vested. For investmentin human capital
have long recognizedthat motivationin usually extendsover a long and variable
turnpartlydepends on earningsbecause period, so the amount invested can-
of the effectof an increasein earningson not be determinedfroma known"invest-
morale and aspirations. Equation (17), ment period." Moreover, the discussion
which was developed to show the effect of on-the-job training clearly indicated
of investmentsoutside the firmfinanced that the amountinvestedis oftenmerged
by an increasein earnings,can also show withgrossearningsinto a singlenet earn-
the effectof an increase in the intensity ings concept (which is gross earnings
of work "financed" by an increase in minus the cost or plus the returnon in-
earnings.Thus W and MP would show vestment).
initial earningsand productivity,C the In the following,some rathergeneral
increase in earnings,and G the gain to relations between earnings, investment
firmsfromthe increase in productivity costs, and rates of return are derived.
caused by the "morale" effectof the in- They permit one to distinguish,among
creasein earnings.The incentiveto grant otherthings,a change in the returnfrom
a morale-boostingincrease in earnings, a change in the amount invested. The
therefore, would depend on the same fac- discussionproceedsin stages fromsimple
tors as does the incentiveto grantan in- to complicated situations. First, invest-
crease used for outside investments. ment is restrictedto a single period and
Many recentdiscussionsof wages in un- returnsto all remainingperiods; then in-
derdevelopedcountrieshave stressedthe vestmentis permittedto be distributed
latter,37while earlier discussions often over a knowngroup of periods called the
stressedthe former.38 investmentperiod. Finally,we show how
the rate of return,amount invested,and
36 If E represents
reportedearningsduringthe in-
vestmentperiodand MP themarginalproductwhen
the investmentperiod can all be derived
thereis no investment,E = MP - C witha general from information on net earnings
investment,E = MP with a specific investment alone.
paid by the firm,and E = MP + C with a pro-
ductiveearningsincrease. Let Y be an activity providinga per-
37 See the papers by Leibenstein,op. cit., and
son enteringat a particular age, called
H. Oshima,"Underdevelopmentin Backward Econ- age zero, with a real net earningsstream
omies:An EmpiricalComment,"JournalofPolitical of Yo duringthe firstperiod, Y1 the next
Economy,Vol. LXVI (June,1958).
period, and so on until Yn is provided
38 For example,Marshall stressedthe effectofan
increasein earningson the characterand habits of duringthe last period. The general term
workingpeople (op. cit.,pp. 529-32, 566-69). "activity" rather than occupation or
another more concrete term is used to providing a net earning stream of X0,
indicate that any kind of investmentin X1, . . . Xn,witha presentvalue of V(X),
human capital is permitted,not just on- the presentvalue of the gain fromchoos-
the-job trainingbut also schooling,in- ing Y would be given by
formation,health,and morale. By "net"
d= V(Y) - V(X)
earningsI continueto mean that tuition
costs duringany period have been sub- E _ X_
_ (19)
tracted and returns added to "gross" i=o ( 1 +i)i0
earningsduringthe same period (see dis-
cussion in Sec. II). "Real" earningsare Equation (19) can be reformulatedto
the sum of monetary earnings and the bringout explicitlythe relationbetween
monetaryequivalent ofpsychicearnings. costs and returns.The cost of investing
Since many persons appear to believe in human capital equals the net earnings
that the term "investment in human foregoneby choosing to invest rather
capital" must be restrictedto monetary than choosing an activity requiringno
costs and returns,let me emphasize that investment.If activity Y requiresan in-
essentiallyall my analysis applies inde- vestmentonly in the initialperiod and if
pendentlyof the division of real earn- X does not require any, the cost of
ings into monetary and psychic com- choosing Y ratherthan X is simply the
ponents. Thus the analysis applies to differencebetween their net earningsin
health, an activity with a large psychic the initial period, and the total return
component, as well as to on-the-job would be the presentvalue of the differ-
training,an activity with a large mone- ences between net earnings in later
tary component. When psychic compo- periods. If C= Xo- Yo, k= Yj-
nents dominate,the language associated Xj, j = 1,... n, and if R measures the
with consumerdurable goods might be total return,the gain from Y could be
consideredmore appropriate than that writtenas
associated withinvestmentgoods, but to
n
simplifythe presentation,I use invest- k
d-C=R-C.
(1i)i (20)
ment language throughout. (I
The presentvalue of the net earnings
streamin Y would be The relationbetweencosts and returns
can be derivedin a different and, forour
V( ) = (18) purposes, preferableway by definingthe
(I Oi)+'
internalrate of return,40whichis simply
a rate of discount equating the present
where i is the market discount rate, as-
value of returnsto the present value of
sumed for simplicityto be the same in
costs. In other words, the internalrate,
each period. If X were another activity
r, is definedimplicitlyby the equation
39Our discussionassumes discreteincome flows
40 A substantialliteraturehas developed on the
and compounding,even though a mathematically
more elegant formulationwould have continuous difference betweenthe incomegain and internalre-
variables,withsums replaced by integralsand dis- turn approaches. See, for example, Friedrichand
count rates by continuouscompounding.The dis- Vera Lutz, The Theoryof Investmentof the Firm
creteapproach is, however,easier to followand yet (Princeton,N.J.: PrincetonUniversityPress, 1951),
yieldsthe same kindofresultsas the continuousap- chap. ii, and the articlesin The Managementof Cor-
proach. Extensions to the continuous case are porateCapital,ed. Ezra Solomon (Glencoe,Ill.: Free
straightforward. Press, 1959).
32 GARY S. BECKER
equate total costs and returns.In sym-

C +(1-+= r)i' (21) bols,
Cl= X. - V., O . I
which clearlyimplies
rn-1
n
Yj Xj C1 = O( I+ r)-,
(1
-
I
(t +r)i+1 - Y
+r)i+1 (22) 0
= d=o , and
= k I1- (?rI + r ) 711,--ff
In
since C = XO - YO and kj = Y- Xi.

C1
C1 -_ . (224
4)
So the internalrate is also a rate of dis-
count equating the presentvalues of net If m = 1, this reduces to equation (23).
earnings.These equations would be con- Two serious drawbacks mar this ap-
siderablysimplifiedifthe returnwerethe pealing straightforwardapproach. The
same in each period, or Yj = Xj + k, estimate of total costs requires a priori
j = 1, . . . n. Thus equation (21) would knowledge and specificationof the in-
become vestment period. While the period
covered by formalschoolingis easily de-
C= k
r
l(+ r)-n] X (2 3) termined,the period covered by much
on-the-jobtrainingand otherinvestment
where (1 + r)-Y is a correctionfor the
is not, and a serious errormight result
finitenessof life that tends toward zero
froman incorrectspecification:to take
as people live longer.
an extreme example, total costs would
If investmentis restrictedto a single
approach zero as the investmentperiod
knownperiod,cost and rate of returnare
is assumed to be longerand longer.4"
easily determinedfrom informationon
A second difficultyis that the differ-
net earnings alone. Since, however, in-
ences between net earningsin X and Y
vestmentin human capital is distributed
do not correctlymeasure the cost of in-
over many periods formalschoolingis
vestingin Y since they do not correctly
usuallymorethan tenyearsin the United
measure earnings foregone. A person
States, and long periods of on-the-job
who invested in the initial period could
trainingare also common the analysis
receivemore than X1 in period 1 as long
must be generalizedto cover distributed
as the initial investmentyielded a posi-
investment.The definitionof an internal
tive return.42The true cost of an invest-
rate in termsof the presentvalue of net
earningsin different activitiesobviously 41 Since
applies regardless of the amount and m-1
duration of investment,but the defini- C1= E(Xj- Y-)(I+ O-i,
0
tion in termsof costs and returnsis not
generalized so readily. If investment n-1
were known to occur in Y during each liM C, (XX- IYj)(I + r) i=0,

0
of the firstm periods,a simpleand super-
by definitionof the internalrate.
ficiallyappealing approach would be to
define the investment cost in each of
42 If
COwas the initialinvestment,ro its internal
rate,and ifthe returnwerethe same in all years,the
these periods as the differencebetween amount
net earnings in X and Y, total invest- 1 = Xi ro o
Xc d
1.
ment costs as the presentvalue of these
differences, and the internalrate would could be receivedin period 1.
ment in period 1 would be the total age of the rates of returnon the indi-
earnings foregone,or the differencebe- vidual investments. Any sequence of
tween what could have been received internalrates or investmentcosts is per-
and what is received. The difference mitted, no matter what the pattern of
between X1 and Y1 could greatly rises and declines, nor what form the
underestimate true costs; indeed, Yj investmentstake, be they a college edu-
mightbe greaterthan X1 even thougha cation, an apprenticeship, ballet les-
large investmentwas made in period 1.43 sons, or a medical examination. Differ-
In general, therefore,the amount in- ent investment programs would have
vested in any period would be deter- the same ultimate effect on earnings
mined not only fromnet earningsin the wheneverthe average rate of returnand
same periodbut also fromnet earningsin the sum of investment costs were the
earlierperiods. same.45
If the cost of an investmentis con- Equation (25) can be given an inter-
sistently defined as the earnings fore- estinginterpretationifall rates of return
gone, quite differentestimates of total were the same. The termk r would then
costs emerge. Although superficiallya be the value at the beginningof the mth
less natural and straightforwardap- period of all succeedingnet earningdif-
proach, the generalizationfroma single ferentialsbetween Y and X discounted
period to distributed investment is
actually greatly simplified.So let Cj be Y1is greaterthan XI if
4
the foregoneearningsin the jth period,

rj the rate of returnon Cj, and let the l-1+ O ro) -n-1
returnper period on Cj be a constant orif
kj, with k = Ykj being the total return
on the whole investment.If the number 1 ( + ro)
of periods was indefinitelylarge, and if whereC1 is the investmentin period 1.
investmentoccurredonly in the firstm
A proofis straightforward.An investmentin
periods, the equation relating costs, re- periodj would yield a returnof the amount ki =
44
turns,and internalrates has thestriking- rjCi in each succeedingperiodifthe numberofperi-

ly simpleformof44 ods was infinite
and the returnwas the same in each.
Since the total returnis the sum of individual re-
m-1 turns,
C= lCj=*, (25) m-1 m-1 m-1 r~
where
0
k= Elkj=
0
E rjCj=
0
CE
0
C=
C
rC
m-1 Cj I am indebtedto Helen Raffelforimportantsugges-
r= Wj c tionswhichled to this simpleproof.
0
45 Note that the rate of returnequatingthe pres-
and ent values of net earningsin X and Y is not neces-
m-1
sarily equal to r, for it would weigh more heavily
thanr does the ratesofreturnon earlierinvestments.
Ew1=1. (26) For example,if rates were higheron investmentsin
0
earlierthan laterperiods,the over-allrate would be
greaterthan i, and vice versa ifrateswerehigherin
Total-cost, efinedsimplyas the sum laterperiods.The difference betweenthe over-allin-
of cost duringeach period,would equal ternalrate forX and Y and r would be small,how-
the capitalized value of returns,the rate ever,as long as the investmentperiodwas not very
long and the systematicdifference betweeninternal
of capitalization being a weightedaver- rates not verygreat.
34 GARY S. BECKER
at the internalrate,r.46Total costs would amount invested in each of the firstm

equal the value also at the beginningof periods could be estimated fromthe net
the mthperiod-which is the end of the earningsstreamsin X and Y alone if the
investmentperiod-of the firstm differ- rate of returnwas the same on all invest-
entialsbetweenX and Y.47 The value of ments. For the internalrate r could be
the firstm differentialsbetweenX and Y determinedfromthe conditionthat the
must equal the value of all succeeding presentvalue ofnet earningsmust be the
differentialsbetween Y and X, since r same in X and Y, and the amount in-
would be the rate of returnequating the vested in each period seriatimfromthe
presentvalues in X and Y. relations48
The internal rate of return and the
CO=XO-YO, Ci=X1-Yi+rCo
46 Thatis,
i-l (27)
co
Cj=Xj-Yj+rJCkO <i< m-i.
k=o
E ( Yj - Xj) ( + r)r-1-j
j=rn
So costs and the rate of returncan be

= (1 +
kEr)m-l=c k. estimatedfrominformationon net earn-
r
ings. This is fortunatesince the return
47 Since, by definition,
on human capital is never empirically
separated from other earnings and the
Xo-Yo= Co , X1-Y1 = Cl-rCo, cost ofsuch capital is onlysometimesand
and moregenerally incompletelyseparated.
j-1 The investmentperiod of education
X- Yj=Cj- r ECh O j< m, can be measured by years of schooling,
k-o
but the periodof on-the-jobtraining,the
then
search forinformation, and otherinvest-
m-1 ments is not readily available. Happily,
(Xi- Yj)(I + r)n-1-i one need not know the investment
i=o
period to estimate costs and returns,
m-1 - since all three can be simultaneously
-
(c- r Ci)(k + r)m11 estimatedfrominformationon net earn-
0
i=0
ings. If activity X were known to have
m-1 no investment(a zero investmentperiod)
= ICj{ (I1+ r)m-1-i-r [1 the amount invested in Y during any
0
period would be definedby
+ (1+ r) + . + (1+ r)M-2-i] 48 If the rate ofreturnwas not the same on all in-
m-I vestmentsthere would be 2m unknowns-CO,...
= Ecj=c. Cm- 1, and ro,. . . rmo-and only m + 1 equa-
0 tions-the m cost definitions and the equation
The analyticaldifference betweenthe naive defi- m-1

nitionof costs advanced earlierand one in termsof
foregoneearningsis that the formermeasurestotal
k=
0
risCi E
at the be-
costs by the value of earningdifferentials
ginningof the investmentperiod and the latterby An additionalm - 1 relationwould be requiredto
the value at the end of the period. Therefore,C' = determinethe 2rn unknowns.The conditionro =
C(1 + r)'-m, whichfollowsfromeq. (24) when n = r = . .. = rm-1is one form these n- 1 relations
co can take.
j-1 definitionis the same: investmentoccurs
Cj=Xj-Yj+r E Ck, allj, (28) in Y wheneverearningsthere are below
0
the sum of those in X and the incomeac-
and total costs by cruingon priorinvestments.If costswere
co found to be greater than zero before
C = 1Cj3. (29) some period m and equal to zero there-
0 after,the firstm periods would be the
empirically derived investment period.
The internalrate could be determinedin But costs and returnscan be estimated
the usual way fromthe equality between fromequation (28) even whenthereis no
presentvalues in X and Y, costs in each simpleinvestmentperiod.
periodfromequation (28) and total costs A common objection to an earlier
fromequation (29). draftofthispaper is that the generaland
The definitionof costs presentedhere rather formal definition of costs ad-
simplyextends to all periods the defini- vanced here is all rightwhen applied to
tion advanced earlierforthe investment on-the-jobtraining,schooling,and other
period.49The rationale for the general recognizedinvestments,but goes too far
49 Therefore,sincethe value ofthe firstmn
earning
by also including as investment costs
differentials
has been shownto equal many effects that should be treated
m-1
otherwise.For example,the protestruns,
ECj suppose that learningwas essentiallyun-
() avoidable in an activityZ, so that earn-
ings "automatically" growsrapidlywith
at period m (see n. 47), total costs could be esti-
matedfromthe value ofall differentialsat the end of experience. Since earnings in Z would
the earningperiod.That is, tend to be lower than those in X at
00 00 younger ages and higher later on, my
C= E Cj =E (xi- Yj) C-1-i. approach would say that investmentoc-
0 0 curs in Z. Criticshave argued that there
reallyis no investmentin Z since the rise
Thus the value of all differentialswould equal zero
at thebeginningofthe earningperiod-by definition in earningsresultsfromunavoidablelearn-
oftheinternalrate-and C at the end. The apparent ing ratherthan froman attempt to im-
paradox resultsfromthe infinitehorizon,as can be prove skills, knowledge, or health. Al-
seen fromthe followingequation relatingthe value
of the first differentials
at the beginningof the gth though the argument is superficially
periodto costs: plausible I am convincedit is as reason-
able to say that investmentin human
f_1
V( f, g) A (Xj-
capital occursin Z as in activitiesrequir-
= Yj)(1 + r)o-1-i
i=0 ing trainingor schooling.Indeed, an im-
portant virtue ratherthan defectin my
f-1
= + r)-f-
concept of human capital is that learn-
YCj(l
i=0 ing-both on and offthe job-is included
along with trainingand schooling.
Whenf = co and g = 0, V = 0,but wheneverf= g,
If Z were preferredto X the higher
f-1 earnings at later ages presumably out-
V= Ec weigh the earnings foregone initially.
0
Similarly,a person enteringan activity
In particular,iff = g =CO) V = C. requiringmuch educationis said to value
36 GARY S. BECKER
the stream of future higher earnings that the total investmentin any activity
more than the net earnings foregone can be determined?
initially. If the lower earnings due to The statement"nothingis investedin
education are called investment costs, an activity" means only nothingwould
the higherearningsinvestmentreturns, be invested afterthe age when informa-
and if costs are related to returnsby an tion on earningsfirstbecame available;
internal rate of return,logical consist- investment can have occurred before
ency and economic sense would require that age. If, forexample, the data begin
that similar concepts apply to learning. at age eighteen, some investment in
Thus the lower initial earningsof high- schooling,health, or informationsurely
school graduates who enter occupations must have occurredat youngerages. The
"with a future"have as much rightto be earning stream of persons who do not
considered investment,both from the invest afterage eighteenwould have to
social and private viewpoints,as do the be considered,at least in part,as a return
lower net earnings of those enrolled in on the investmentbefore eighteen. In-
college. In general,since the private and deed, in the developmentalapproach to
social rankingof differenteconomic ac- child-rearing(discussed in Selma Mush-
tivitiesdepend only on theirnet earning kin's paper), mostifnot all ofthese earn-
streams,if one activity was said to re- ings would be so considered.
quire a given investmentand to yield a The earning stream in an activity
given return,another activity with the with no investmentbeyond the initial
same net earningstreammust be said to age (activityX) would be flat if the de-
require the same investmentand yield velopmentalapproach was followedand
the same return,no matter how they earningswere said to resultentirelyfrom
differin otherrespects. earlier investment." The minimum in-
So much in defenseof our approach. vestmentcould then be determinedif an
To estimate costs empiricallystill has assumption was made about its rate to
requireda prioriknowledgethat nothing return.My discussionof the shape of the
is invested in activity X. Without such earningstream in X is, however,highly
knowledge,only the difference between conjectural,52and furtherinvestigation
the amounts invested in any two activi- may well indicate that anotherapproach
ties with known net earning streams is preferable.
could be estimated fromthe definitions Our assumption that lifetimes are
in equation (28). Were this done for all infinite,although descriptivelyunreal-
available streamsthe investmentin any istic,is oftena veryclose approximation.
activitybeyond that in the activitywith For example, I have shown elsewhere
the smallest investmentcould be deter- that the average rate of returnon college
mined.50The observed minimuminvest- education in the United States could
ment would not be zero, however,if the
51If C measuredthe cost ofinvestmentbeforethe
rate of returnon some initialinvestment
initial age and r its rate of return,k = rC would
was sufficientlyhighto attracteveryone. measurethe returnper period. If earningswere at-
A relevantquestion is, therefore:can the tributedentirelyto this investment,Xi = k = rC,
shape of the streamin an activityhaving whereXi representsearningsat the ith period past
the initialage.
zero investmentbe specifieda priori so
52 But note that empiricalevidenceindicatesthat
50The techniqueis applied and furtherdeveloped age-earningprofilesin unskilledoccupationsare very
by Mincerin his paper in this Supplement. flat.
only be slightlyraised ifpeople remained amount invested can be distinguished

in the labor force indefinitely.A finite empiricallyfromthe effectof a change in
earning period has, however, a greater rates of return.Our attentionnow turns
effecton the rate of return of invest- to the factorsinfluencingthe amount in-
ments occurringat later ages, say after vested in different activities and by dif-
age forty;indeed, it helps explain why ferent persons. Economists have long
schoolingand otherinvestmentsare pri- believed that the incentiveto expand and
marilymade at youngerages. improve physical resources depends on
An analysis of finiteearning streams the rate of returnexpected. They have
can be approached in two ways. One been very reluctant,however, to inter-
simply applies the concepts developed pret improvementsin the effectiveness
forinfinitestreamsand says thereis dis- and amount of human resourcesin the
investmentin human capital when net same way, namely, as systematic re-
earningsare above the amountthat could sponses or "investments" resulting in
be maintained indefinitely.Investment good part fromthe returnsexpected. In
at youngerages would give way to dis- this sectionI tryto show that an invest-
investmentat older ages until no human ment approach to human resourcesis a
capital remained at death (or retire- powerfuland simple tool capable of ex-
ment). This approach has several im- plaininga wide range of phenomena,in-
portantapplicationsand is used in parts cluding much that has either been ig-
of my study.An alternativethat is more nored or given ad hocinterpretations.
usefulforsome purposeslets the earning An increasein the lifespanof an activ-
period itselfinfluencethe definitionsof itywould,otherthingsthe same, increase
accrued incomeand cost. The income re- the rate of return on the investment
sulting from an investment during made in any period. The influenceof
periodj would be definedas lifespanon the rate of returnand thus on
the incentiveto invest is importantand
r3C1
k-= -_(l+,j~j X (30) takes many forms.A few of these forms
will now be discussed.
where n + 1 is the earningperiod, and The number of periods is obviously
the amount invested duringj would be affected by mortality and morbidity
definedby rates, forthe lower they are, the longer
the expected lifespan,and the largerthe
Cj= Xj- Yj fractionof a lifetimethat can be spent
k=j-l rkCk (31) at any activity. The major secular de-
? cline of these rates in the United States
o 1 +
(1 rk+)k-n
and elsewheremay have increased the
IV. THE INCENTIVE TO INVEST
rates of returnon investmentin human
capital,53thereby encouraging such in-
A. NUMBER OF PERIODS
vestment.This conclusionis independent
The discussion summarized in equa-
53I say maybecause ratesof returnare adversely
tions (28) and (31) showshow total costs, affectedby the increasein labor forcethat would re-
rates of return, and the investment sult froma declinein death and sickness.If the ad-
period can be estimated frominforma- verseeffectwas sufficientlygreat,a declinein death
and sicknesswould reduceratesof returnon human
tion on net earningsalone, and thus how capital. I am indebtedto my wifeforemphasizingI-
the effecton earningsof a change in the this point.
38 GARY S. BECKER
of whetherthe secular improvementin for p periods only, where p varied be-

health itselfresultedfrominvestment;if tween o and n. The size of p would be
so, the secular increasein rates of return affectedby many factors,includingthe
would be part of the returnto invest- rate of obsolescence since the more
ment in health. rapidly an investmentbecame obsolete
A relativelylarge fractionof younger the smallerp would be. The advantage in
personsare in school, enterupon on-the- being young would be less the smallerp
job training,change jobs and locations, was, since the effectof age on the rate of
and add to theirknowledgeof economic, returnwould be positivelyrelated to p.
political, and social opportunities.The For example,if p equaled two years, the
entire explanation of these differences rate would be the same at all ages except
betweenyoung and old personsmay not the two nearest the "retirement"age. If
be that the young are more interestedin the investmentapproach was correct,the
learning,more able to absorb new ideas, differencebetween the amount invested
less tied down by familyresponsibilities, at different ages would be positivelycor-
more easily supported by parents, or related with p, which is not surprising
moreflexibleabout changingtheirroutine since an expenditure with a small p
and place of living. One need not rely would be less of an "investment" than
only on life-cycleeffectson capabilities, one witha large p, and argumentsbased
responsibilities,or attitudes as soon as on an investmentframeworkwould be
one recognizes,as we have throughout, less applicable. None of the life-cycle
that schooling, training,mobility, and argumentsseem to implyany correlation
the like are ways to invest in human withp, so thisprovidesa powerfultest of
capital and that youngerpeople have a the importance of the investment ap-
greaterincentiveto invest because they proach.
can collect the returnover more years. The time spent in any one activity is
Indeed, a greater incentive would be determinednot only by age, mortality,
present even if age had no effecton and morbiditybut also by the amount of
capabilities, responsibilities,and atti- switching between activities. Women
tudes. spend less time in the labor forcethan
Althoughthe unificationof these dif- men and, therefore,have less incentive
ferentkinds of behavior by the invest- to invest in marketskills; touristsspend
ment approach is importantevidence in littletime in any one area and have less
its favor, other evidence is needed. A incentive than residentsof the area to
powerfultest can be developed along the invest in knowledgeof specificconsump-
followinglines.55Suppose that invest- tion opportunities;56 temporarymigrants
ment in human capital raised earnings to urban areas have less incentiveto in-
vest in urban skills than permanentresi-
54 Younger personswould also have a greaterin-
centiveto investif the cost of any investmentrose dents; and, as a final example, draftees
with age, say, because potentialand thus foregone have less incentive than professional
earningsrose with age.
soldiers to invest in purely military
"5 This testwas suggestedby GeorgeStigler'sdis-
skills.
cussionofthe effectofdifferentauto-correlation
pat-
ternson the incentiveto investin information(see Women, tourists,and the like have to
"The Economicsof Information,"JournalofPoliti-
cal Economy,Vol. LXIX [June,19611,and his paper 56 This example is fromStigler,"The Economics
in this Supplement). of Information,"op. cit.
findinvestmentsthat increaseproductiv- B. WAGE DIFFERENTIAlS AND
ity in several activities.A womann wants SECULAR CHANGES
her investmentto be useful both as a According to equation (30) the in-

housewifeand as a participantin the la- ternalrate of returndepends on the ratio
bor force,or a frequenttraveler wants of the returnper unit timeto investment
to be knowledgeablein many environ- costs.A changein the returnand costsby
ments. Such investmentswould be less the same percentage would not change
readily available than more specialized the internal rate, while a greater per-
ones-after all, an investmentincreasing centage change in the return would
productivityin two activities also in- change the internalrate in the same di-
creases it in either one alone, extreme rection. The returnis measured by the
complementarityaside, while the con- absolute income gain, or by the absolute
versedoes not hold; specialists,therefore, incomedifference betweenpersonsdiffer-
have greaterincentiveto investin them- ing only in the amount of their invest-
selves than othersdo. ment. Note that absolute, not relative,
Specialization in an activitywould be income differences determinethe return
discouraged if the market were very and the internalrate.
limited; thus the incentiveto specialize Occupational and educational wage
and to investin oneselfwould increaseas differentials are sometimesmeasured by
the extent of the market increased. relative, sometimes by absolute, wage
Workerswould be moreskilledthe larger differences,59 although no one has ade-
the market,not only because "practice quately discussed their relative merits.
makes perfect,"so oftenstressedin dis- Marginal productivity analysis relates
cussions of the division of labor,57but the derived demand for any class of
also because a larger market would in- workersto the ratio of their wages to
duce a greaterinvestmentin skills.58Put those of otherinputs,60 so wage ratiosare
differently,the usual analysis of the moreappropriatein understandingforces
divisionof labor stressesthat efficiency, determiningdemand. They are not, how-
and thuswage rates,would be greaterthe ever,the best measureofforcesdetermin-
larger the market, and ignores the po- ing supply,forthe returnon investment
tential earningsperiod in any activity, in skills and other knowledge is deter-
while ours stressesthat this period, and mined by absolute wage differences.
thus the incentive to becomemore ef-
ficient, would be directly related to 59See A. M. Ross and W. Goldner,"Forces Af-
fectingthe Inter-industryWage Structure,"Quar-
marketsize. Surprisinglylittle attention terlyJournalofEconomics,Vol. LXIV (May, 1950);
has been paid to the influenceof market P. H. Bell, "Cyclical Variationand Trendin Occupa-
size on the incentiveto invest in skills. tional Wage Differentialsin American Industry
since 1914," ReviewofEconomicsand Statistics,Vol.
See, for example, Marshall, op. cit., Bk. IV,
57 XXIII (November, 1951); F. Meyers and R. L.
chap. ix. Bowlby, "The InterindustryWage Structureand
58
If "practice makes perfect"means that age- Productivity,"Industrial and Labor Relations Re-
view,Vol. VII (October, 1953); Stiglerand Blank,
earningsprofilesslope upward,thenaccordingto my
approach it must be treatedalong with otherkinds op. cit., Table 11; P. Keat, "Long-Term Trends in
of learningas a way of investingin human capital. OccupationalWage Differentials," JournalofPoliti-
The distinctionabove between the effectof an in- cal Economy,Vol. LXVIII (December, 1960).
creasein themarketon practiceand on theincentive 60 Thus the elasticityof a substitutionis usually
to investwouldsimplybe thattheincentiveto invest definedas thepercentagechangein theratioofquan-
in human capital is increased even aside fromthe titiesemployedper 1 per cent change in the ratio of
effectof practiceon earnings. wages.
40 GARY S. BECKER
Thereforeneitherwage ratios nor wage interpretationsuggestedby our analysis

differences are uniformlythe best meas- is that the spread of education and the
ure, ratiosbeing more appropriatein de- increased investmentin other kinds of
mand studies and differencesin supply human capital were in large part induced
studies. by technologicalprogress (and perhaps
The importanceof distinguishingbe- other changes) throughthe effecton the
tween wage ratios and differences, and rate of return,as measured by wage dif-
the confusionresultingfromthe practice frencesand costs. Clearly a secular de-
of using ratios to measure supply as well cline in wage ratios is not inconsistent
as demand forces,can be illustratedby with a secular increase in real wage dif-
consideringthe effectsof technological ferences if average wages were rising,
progress.If progresswere uniformin all and, indeed, one importantbody of data
industriesand neutralwith respectto all on wages showsa declinein ratiosand an
factors,and if therewere constantcosts, even strongerrise in differences.62
initiallyall wages would riseby the same The interpretationbased on auton-
proportionand the prices of all goods, omous supply shifts has been favored
includingthe output of industriessup- partly because a decline in wage ratios
plyingthe investmentin human capital,6" has erroneouslybeen taken as evidence
would be unchanged. Since wage ratios of a declinein the returnto skill.While a
would be unchanged, firmswould have decisionultimatelycan be based only on
no incentiveinitiallyto alter theirfactor a detailed re-examinationof the evi-
proportions. Wage differences,on the dence,63the induced approach can be
other hand, would rise at the same rate made more plausible by considering
as wages, and since investment costs trends in physical capital. Economists
would be unchanged,therewould be an have been aware that the rate of return
incentiveto invest more in human capi- on capital could be risingor at least not
tal, and thus to increase the relative falling while the ratio of the "rental"
supply of skilled persons. The increased price of capital to wages was falling.
supply would in turn reduce the rate of Consequently,although the rental price
increaseof wage differences and produce 62 Keat's data for 1906-53 in the United States
an absolute narrowingof wage ratios. show both an average annual declineof 0.8 per cent
In the United States duringmuch of of variationof wages and an aver-
in the coefficient
age annual rise of 1.2 per cent in the real standard
the last eightyyears,a narrowingofwage deviation.The declinein the coefficient of variation
ratios has gone hand in hand with an in- was shown in his study (op. cit); I computed the
creasing relative supply of skill, an as- change in the real standard deviation from data
made available to me by Keat.
sociation that is usually said to result 63 For those believing that the evidence over-
fromthe effectof an autonomousincrease whelminglyindicatesa seculardeclinein rates of re-

in the supply of skills-brought about turn on human capital, I reproduceAdam Smith's
by the spread of free education or the statementon earningsin some professions."The lot-
teryof the law, therefore,is very far frombeing a
risein incomes-on the returnto skill,as perfectlyfair lottery; and that, as well as many
measuredby wage ratios. An alternative otherliberal and honourableprofessions, is, in point
of pecuniary gain, evidently under-recompensed"
61 Some personshave argued that only directin- (The WealthofNations[New York: ModernLibrary,
vestmentcostswouldbe unchanged,indirectcosts or 1937],p. 106). Since economiststend to believe that
foregoneearningsrisingalong with wages. Neutral law and mostotherliberalprofessionsare now over-
progressimplies,however,the same increasein the compensatedrelative to non-professional work "in
productivityof a student's time as in his teacher's point of pecuniarygain," the returnto professional
timeor in the use ofraw materials,so even foregone workcould not have declinedcontinuouslyifSmith's
earningswould not change. observationswereaccurate.
of capital declinedrelativeto wages over culations I have made suggestthat there

time, the large secular increase in the is much uncertaintyabout the returnto
amount of physicalcapital per man-hour human capital.64 The response to un-
is not usually considered autonomous, certaintyis determinedby its amount
but ratherinduced by technologicaland and nature and by tastes or attitudes.
otherdevelopmentsthat, at least tempo- Many have argued that attitudes of in-
rarily,raised the return.A common ex- vestorsin human capital are very differ-
planation based on the effectsof eco- ent fromthose of investorsin physical
nomic progressmay, then, account for capital because the formertend to be
the increasein both human and physical younger,65 and young persons are sup-
capital. posed to be especially prone to overesti-
mate their ability and chance of good
C. RISK AND LIQUIDITY
fortune.66 Were this view correct,a hu-
An informed,rationalpersonwould in- man investmentwhich promiseda large
vest only if the expected rate of return return to exceptionally able or lucky
was greaterthan the sum of the interest personswould be more attractivethan a
rate on risklessassets and the liquidity similarphysical investment.However, a
and riskpremiumsassociated withthe in- "life-cycle"explanation of attitudes to-
vestment.Not much need be said about ward risk may be no more valid or nec-
the "pure" interestrate,but a fewwords essary than life-cycle explanations of
are in orderon risk and liquidity. Since whyinvestorsin human capital are rela-
human capital is a veryilliquid asset-it tively young (discussed on pp. 37-38).
cannot be sold and is rather poor col- Indeed, an alternativeexplanationof re-
lateral on loans a positive liquidity actions to large gains has already ap-
premium,perhaps a sizable one, would peared.67
be associated with such capital. 64 For example, Marshall said: "Not much less
The actual returnon human capital than a generationelapses betweenthe choiceby par-
varies around the expected return be- ents of a skilledtrade forone of theirchildren,and
his reapingthefullresultsoftheirchoice.And mean-
cause of uncertaintyabout several fac- while the characterof the trade may have been al-
tors.There always has been considerable most revolutionizedby changes, on which some
uncertaintyabout the lengthof life,one probably threw long shadows before them, but
otherswere such as could not have been foreseen
important determinant of the return. even by the shrewdestpersons and those best ac-
People are also uncertain about their quainted with the circumstancesof the trade" (op.
ability, especially youngerpersons who cit., p. 571), and "the circumstancesby which
the earningsare determinedare less capable ofbeing
do most of the investing. In addition, foreseen[thanthose formachinery]"(ibid.).
thereis uncertaintyabout the returnto 65 Note that our argumenton p. 38 implied that
a personof given age and abilitybecause investorsin human capital would be younger.
66 Smithsaid: "The contemptof riskand thepre-
of numerousevents that are not predict-
sumptuoushope of success, are in no period of life
able. The long time required to collect moreactive than at the age at whichyoungpeople
the returnon an investmentin human choose theirprofessions"(op. cit.,p. 109). Marshall
capital reduces the knowledgeavailable, said that "youngmen ofan adventurousdisposition
are moreattractedby the prospectsof a great suc-
for requiredis knowledgeabout the en- cess than they are deterredby the fear of failure"
vironmentwhen the returnis to be re- (op. cit.,p. 554).
ceived,and the longerthe average period 67 See M. Friedmanand L. J. Savage, "The Util-
between investmentand returnthe less ityAnalysisofChoicesInvolvingRisk," reprintedin

Readings in Price Theory,ed. G. J. Stigler and
such knowledgeis available. K. Boulding (Chicago: Richard D. Irwin, Inc.,
Informedobservation as well as cal- 1952).
42 GARY S. BECKER
D. CAPITAL MARKETS AND KNOWLEDGE 1. Since large expenditureswould be

If investmentdecisions respond only more difficultto finance,investmentin
to earning prospects, adjusted for risk (say) a college education would be more
and liquidity,the adjusted marginalrate affectedthan in (say) short-termmigra-
of returnwould be the same on all in- tion.
vestments.The rate of returnon educa- 2. Internal financingwould be com-
tion, training, migration, health, and mon,and consequentlywealthierfamilies
other human capital is supposed to be would tend to invest more than poorer
higherthan elsewhere,however,because ones.
of financingdifficultiesand inadequate 3. Since employees' specificskills are
knowledge of opportunities.These will part of the intangibleassets or good will
now be discussed briefly. of firmsand can be offeredas collateral
Economistshave long emphasizedthat along with tangibleassets, capital would
to borrowfundsto investin
it is difficult be more readily available for specific
human capital because such capital can- than forgeneralinvestments.
not be offeredas collateral and courts 4. Some personshave argued that op-
have frownedon contracts which even portunitycosts (foregoneearnings) are
indirectlysuggestinvoluntaryservitude. more readily financedthan direct costs
This argumenthas been explicitlyused because they require only to do "with-
to explain the "apparent" underinvest- out," while the latter require outlays.
ment in education and trainingand also, Although superficially plausible, this
althoughsomewhatless explicitly,under- view can easily be shown to be wrong:
investment in health, migration, and opportunity and direct costs can be
otherhuman capital. The importanceat- financedequally readily,given the state
tached to capital market difficulties can of the capital market. If total invest-
be determinednot only fromthe discus- ment costs were $800, potentialearnings
sions of investmentbut also from the $1,000, and if all costs were foregone
discussionsof consumption.Young per- earnings,investorswould have $200 of
sons would consume relatively little, earningsto spend; ifall weredirectcosts,
productivityand wages mightbe related, they would initially have $1,000 to
and some other consumption patterns spend, but just $200 would remainafter
would follow only if it were difficultto paying "tuition," so their net position
capitalize futureearningpower. Indeed, would be exactlythe same as before.The
unless capital limitationsapplied to con- example can be readily generalized and
sumptionas wellas investment,thelatter the obvious inferenceis that indirectand
could be indirectlyfinancedwith "con- directinvestmentcosts are equivalent in
sumption"loans."8 imperfect as well as perfect capital
Some other implications of capital markets.
market difficultiescan also be men- While it is undeniablydifficultto use
tionrdl the capital market to finance invest-
ments in human capital, there is some
68 A personwithan incomeof X and investment
costsof Y (1 < X) could eitheruse X forconsuinp- reason to doubt whether otherwise
tion and receive an iinvestmientloan of Y. or use equivalent investmentsin physical capi-
X - Y forconsumption,Y forinvestment,and re- tal can be financed much more easily.
ceive a consulmptionloan of Y. He ends up withthe
same consumptionand investmentin bothcases, the Consideran eighteen-year-old who wants
onlydifference beingin the names attachedto loans. to invest a given amount in equipment
fora firmhe is startingratherthan in a The eighteen-year-oldin our example

college education. What is his chance of who could not finance a purchase of
borrowingthe whole amount at a "mod- machinerymight,withouttoo much cost,
erate" interestrate? Very slight, I be- postpone the investmentfora numberof
lieve, sincehe would be untriedand have years until his reputation and equity
a high debt equity ratio; moreover,the were sufficientto provide the "personal"
collateral provided by his equipment collateral required to borrow funds.
would probably be very imperfect.He, Financing may prove a more formidable
too, would eitherhave to borrowat high obstacle to investors in human capital
interest rates or self-finance.Although because they cannot postpone their in-
the difficultiesof financinginvestments vestment so readily. Perhaps this ac-
in human capital have usually been re- counts forthe tendencyof economiststo
lated to special properties of human stresscapital marketimperfections when
discussinginvestmentsin human capital.
capital, in large measure they seem also
to beset comparable investments in
V. SOME EFFECTS OF HUMAN CAPITAL
physical capital.
A recurringtheme is that young per- A. EXAMPLES
sons are especially prone to be ignorant Differencesin earningsamong persons,

of their abilities and of the investment areas, or time periods are usually said to
opportunitiesavailable. If so, investors result fromdifferencesin physical capi-
in human capital, being younger,would tal, technologicalknowledge,ability, or
be less aware of opportunitiesand thus institutions (such as unionization or
more likely to err than investors in socialized production).Our analysis indi-
tangible capital. I suggestedearlier (pp. cates, however, that investmentin hu-
37-38) that investorsin human capital man capital also has an importanteffect
on observed earnings because earnings
are youngerpartlybecause of the cost in
tend to be net of investmentcosts and
postponing their investment to older
gross of investmentreturns.Indeed, an
ages. The desire to acquire additional
appreciation of the direct and indirect
knowledge about the returnand about
importanceof human capital appears to
alternatives provides an incentive to resolve many otherwise puzzling em-
postponeany riskyinvestment,but since pirical findingsabout earnings.Consider
an investmentin human capital is more the followingexamples:
costly to postpone, it would be made l. Almost all studies show that age-
earlierand presumablywith less knowl- earningsprofilestendto be steeperamong
edge than comparable non-human in- more skilled and educated persons. I
vestments. Therefore,investors in hu- argued earlier (pp. 14-15) that on-the-
man capital may not have less knowledge job trainingwould steepen age-earning
becauseoftheirage; ratherboth mightbe profilesand the analysis of Section III
a joint product of the incentive not to generalizes the argument to all human
delay investing.69 capital. Since observed earnings are
gross of returnsand net of costs, invest-
69 Marshall (op. cit.,pp. 571-73) appears to argue
ment in human capital at youngerages
that it is also intrinsicallymore difficult
to acquire
knowledgeabout the returnfroman investmentin would reduceobservedearningsthenand
humancapital. raise themat older ages, thus steepening
44 GARY S. BECKER
the age-earningsprofile]0 to estimate empiricallythe elasticity of

2. In recent years students of inter- substitutionbetween capital and labor.
national trade theory have been some- Usually a ratio of the input of physical
what shakenby findingsthat the United capital to the input of labor is regressed
States, said to have relative scarcity of on thewage rate in different areas or time
labor and abundance of capital, ap- periods, the regressioncoefficientbeing
parently exports relatively labor-inten- an estimate of the elasticityof substitu-
sive commoditiesand importsrelatively tion.73Countries,states, or time periods
capital-intensive commodities. For ex- that have relativelyhigh wages and in-
ample, one study found that export puts ofphysicalcapital also tend to have
industriespay higherwages than import much human capital. Just as a correla-
competingones.7" tion betweenwages, physical capital and
An interpretationconsistentwith the human capital seems to obscure the rela-
Ohlin-Heckscheremphasis on the relationshipbetween relativefactorsupplies
tive abundance ofdifferent factorsargues and commodityprices,so it obscuresthe
that the United States has an even more relationshipbetween relative factorsup-
(relatively) abundant supply of human plies and factorprices. For ifwages were
than of physical capital. An increase in highprimarilybecause of human capital,
human capital would, however,show up a regressionof the relative amount of
as an apparent increasein labor intensity physical capital on wages could give a
since earningsare gross of the returnon seriouslybiased picture of the effectof
such capital. Thus export industries factorproportionson wages.74
might pay higher wages than import
has been put for-
72 This kind of interpretation
competing ones primarilybecause they ward by manywriters;see, forexample,the discus-
employ more skilled or healthier work- sion in W. Leontief,"Factor Proportionsand the
ers.72 Structureof AmericanTrade: FurtherTheoretical
and Empirical Analysis," Reviewof Economicsand
3. Several recent studies have tried Statistics,Vol. XXXIII (November,1956).
73 Interstateestimatesforseveral industriescan
70Accordingto eq. (28) earnings at age j can be
be foundin J. Minasian,"ElasticitiesofSubstitution
approximatedby
and Constant-OutputDemand Curves forLabor,"
k=j-l
Journalof Political Economy,LXIX (June, 1961),
Yj = Xj + E rkCk-C1, 261-70; intercountry estimatesin Kenneth Arrow,
k=o Hollis B. Chenery,Bagicha Minhas, and Robert M.
Solow, "Capital-Labor Substitutionand Economic
whereXi are earningsat j of persons who have not Efficiency,"ReviewofEconomicsand Statistics(Au-
investedin themselves,Ck is the investmentat age gust, 1961); unpublishedpapers by Philip Nelson
k, and rk is its rate of return.The rate of increasein and Robert Solow containboth interstateand time-
earningswould be at least as steep in V as in X at seriesestimates.
each age and not only from"younger" to "older"
7 Minasian's argument(op. cit.,p. 264) that in-
ages if and only if
terstatevariationsin skill level necessarilybias his
Yj > AXi estimates toward unity is actually correctonly if
4j - 4' skill is a perfectsubstitutefor "labor." (In corre-
spondenceMinasian states thathe intendedto make
or
thisconditionexplicit.)If, on the otherhand,human
> AC- and physicalcapital wereperfectsubstitutesthe es-
timateswouldalwayshave a downwardbias, regard-
less of the truesubstitutionbetweenlabor and capi-
This conditionis usuallysatisfiedsincerjCj > 0 and tal. Perhaps the most reasonableassumptionwould
the amountinvestedtends to declinewithage. be thatphysicalcapital is morecomplementary with
71 See I. Kravis, "Wages and Foreign Trade," humancapital thanwithlabor; I have not,however,
Reviewof Economicsand Statistics,Vol. XXXIII been able to determinethe directionof bias in this
(February,1956). case.
INVESTiMENT IN HUMAN CAPITAL: A THEORETICAL ANALYSIS 45
4. A secular increase in average earn- sonality, persistence, and intelligence.

ings has usually been said to resultfrom Accordingly,some writershave gone to
increasesin technologicalknowledgeand the oppositeextremeand argued that the
physicalcapital per earner.The average only relevant way to measure economic
earner,in effect,is supposed to benefit talent is by results,or by earningsthem-
indirectlyfrom activities by entrepre- selves.77 Persons with higher earnings
neurs,investors,and others.Anotherex- would simply have more ability than
planation put forward in recent years others,and a skeweddistributionofearn-
argues that earningscan rise because of ings would imply a skewed distribution
directinvestmentin earners.75 Instead of of abilities. This approach goes too far,
onlybenefitingfromactivitiesby others, however,in the opposite direction.The
the average earner is made a prime main reason for an interestin relating
mover of development through the in- ability to earningis to distinguishits ef-
vestmentin himself.76 fects from differences in education,
training,health, and other such factors,
B. ABILITY AND THE DISTRIBUTION
OF EARNINGS
and a definitionequating ability and
earningsipso facto precludes such a dis-
An emphasis on human capital not tinction. Nevertheless, results are very
onlyhelps explain differences in earnings relevantand should not be ignored.
over time and among areas but also A compromise might be reached
amongpersonsor familieswithinan area. throughdefiningabilityby earningsonly
This application will be discussed in when several variables had been held
greaterdetail than the othersbecause a constant. Since the public is very con-
link is providedamong earnings,ability, cerned about separating ability from
and the incentive to invest in human education, on-the-job training, health,
capital. and otherhuman capital, the amount in-
Economistshave long been aware that vested in such capital would have to be
conventional measures of ability-in- held constant. Although a full analysis
telligencetestsor aptitude scores,school would also hold discrimination,nepo-
grades,and personalitytests while un- tism,and several otherfactorsconstant,
doubtedly relevant at times, do not re- a reasonable firstapproximation would
liably measure the talents required to say that if two persons have the same
succeed in the economic sphere. The investment in human capital, the one
latter requires a particular kind of per- who earns more is demonstratinggreater
75 The major figurehere undoubtedlyis T. W. economic talent.
Schultz. Of his many articles see esp. "Education Since observed earnings are gross of
and Economic Growth"in Social ForcesInfluencing
AmericanEducation (SixtiethYearbook of the Na- the returnon human capital theyare af-
tional Societyforthe Study of Education, Part II fected by changes in the amount and
[Chicago: Universityof Chicago Press, 1961]). rate of return.Indeed, after the invest-
" One caveat is called for,however. Since ob-
servedearningsare not onlygrossof the returnfrom
ment period earnings (Y) can be simply
investmentsin human capital but also are net of approximatedby
some costs,an increasedinvestmentin human capi-
tal would both raise and reduceearnings.Although Y = X + rC, (32)
average earningswould tend to increaseas long as
the rate of returnwas positive,the increase is less 77Let me state again that wheneverthe word
than it would be if the cost of human capital, like "earnings"appears I mean real earnings,or the sum
that of physical capital, was not deducted from of monetaryearningsand the monetaryequivalent
nationalincome. of psychicearnings.
46 GARY S. BECKER
whereC measurestotal investmentcosts, One is that the tendencyforabler per-

r the average rate of return,and X earn- sons to migrate, continue their educa-
ings when thereis no investmentin hu- tion,82and generallyinvestmorein them-
man capital. If the distributionof X is selves can be explained withoutrecourse
ignored for now, Y would depend only to an assumption that non-economic
on r when C was held constant,so "abil- forcesor demand conditionsfavor them
ity" would be measured by the average at higher investment levels. A second
rate of returnon human capital.78 implication is that the separation of
The amount invested is not the same "nature from nurture" or ability from
foreveryone,nor even in a very imper- education and other environmentalfac-
fect capital market rigidlyfixedforany forhigh earn-
tors is apt to be difficult,
givenperson,but depends in part on the ings would tend to signifyboth more
rate of return.Persons receivinga high ability and a better environment.Thus
marginal rate of returnwould have an the earningsdifferential between college
incentive to invest more than others.79 and high-school graduates does not
Since marginaland average ratesare pre- measure the effectof college alone since
sumablypositivelycorrelated80 and since college graduates are abler and would
ability is measured by the average rate, earn more even without the additional
one can say that abler personswould in- education. Or reliable estimates of the
vest more than others. The end result income elasticityof demand forchildren
would be a positive correlationbetween have been difficultto obtain because
ability and the investment in human higherincome familiesalso invest more
capital,8' a correlationwith several im- in contraceptiveknowledge.83
portantimplications. The main implication,however,is in
the fieldof personalincome distribution.
ofC, Y wouldindirectlyas
78 Since r is a function
well as directlydepend on C, and thereforethe dis- At least ever since the time of Pigou
tributionof abilitywould depend on the amount of economists have tried to reconcile the
human capital. Some persons might rank high in strong skewness in the distributionof
earningsand thus high in ability if everyonewere
unskilled,and quite low ifeducationand othertrain- earnings and other income with a pre-
ing werewidespread. sumed symmetricaldistributionof abili-
79 In addition,theywould findit easier to invest ties.84Pigou's own solution, that prop-
if the marginalreturnand the resourcesof parents erty income is not symmetricallydis-
and otherrelativeswerepositivelycorrelated.
tributed,does not directlyhelp explain
80 Accordingto a well-knownformula the skewnessin earnings.Subsequent at-
r = ral+
( +11 tempts have largely concentrated on
developing ad hoc random and other
whererm is the marginalrateofreturn,ratheaverage probabilisticmechanismsthat have little
rate, and ea the elasticityof the average rate with 82 The firstis frequentlyalleged (see, forexample,
respectto the amountinvested.The ratesrmand ra
Marshall,op. cit.,pp. 199,684). Evidence on the sec-
would be positivelycorrelatedunless ra and l/ea
ond is discussed in my forthcomingstudy for the
were sufficientlynegativelycorrelated.
National Bureau of Economic Research.
81 This kind of argumentis not new; Marshall
83 See my "An EconomicAnalysisof Fertility"in
argued that business ability and the ownershipof
Demographicand Economic Change in Developed
physical capital would be positively correlated: Countries (Princeton, N.J.: Princeton University
"[economic]forces. . . bring about the result that
Press, 1960).
thereis a farmoreclose correspondence betweenthe
84 See A. C. Pigou, The EconomicsofWelfare(4th
abilityofbusinessmenand the size ofthe businesses
which they own than at firstsight would appear ed.; London: Macmillan & Co., 1950), Part IV,
probable" (op. cit.,p. 312). chap. ii.
relation to the mainstreamof economic capable, therefore, ofreconcilinga strong
thought.85 The approach presentedhere, positive skewnessin earningswith a pre-
however, offersan explanation that is sumed symmetricaldistributionof abili-
not onlyconsistentwith economicanaly- ties.
sis but actually relies on one of its Variations in X help explain an im-
fundamental tenets; namely, that the portant difference among skill categories
amountinvestedis a functionof the rate in the degree of skewness. The smaller
of returnexpected. In conjunctionwith the fractionof total earnings resulting
the effectof human capital on earnings
86Jacob Mincer ("Investmentin Human Capital
thistenetcan explain severalwell-known
and Personal Income Distribution,"JournalofPo-
propertiesof earningsdistributions. litical Economy,Vol. LXVI [August, 1958]) con-
By definition,the distributionof earn- cludedthata symmetricaldistributionofinvestment
ingswould be exactlythe same as the dis- in education impliesa skewed distributionof earn-
ings because he defineseducational investmentby
tributionof ability if everyoneinvested school years ratherthan costs. If we followMincer
the same amount in human capital; in in assuming that everyonewas equally able, that
particular,if ability were symmetrically schoolingwas the onlyinvestment,and that the cost
of the nth year of schoolingequaled the earningsof
distributed, earnings would also be. personswith n - 1 years of schooling,then,say, a
Equation (32) shows that the distribu- normaldistributionofschoolingcan be shownto im-
tion of earnings would be exactly the ply a log-normaldistributionof school costs, and
thus a log-normaldistributionof earnings.
same as the distributionof investmentif The difference between the earningsof persons
all persons were equally able; again, if withn - 1 and n years of schoolingwould be kA=
investment were symmetrically dis- Y- Yn,- = rnCn. Since r, is assumed to equal r for
all n, and Cn = Y.-l, this equation becomes Y, =
tributed, earnings would also be.86 If (1 + r) Yn.4 and therefore
ability and investment both varied,
Cl = Yo
earningswould tend to be skewed even
when ability and investmentwere not, C2= Y,= Yo(1+r)
but the skewness would be small as
long as the amount invested was sta- C3 = Y2 = Yj(1 + r) = YO(1 + r)2
tisticallyindependentof ability.87 Q = Yn-1 = Yo(1 + r)n 1 ,
Our analysishas shown,however,that
or the cost of each additional year of schoolingin-
abler personswould tend to invest more creasesat a constantrate. Since total costs have the
than others, so ability and investment same distributionas (1 + r)n, a symmetrical,say a
would be positively correlated,perhaps normal,distributionofschoolyears,n, impliesa log-
normaldistributionofcosts and henceby eq. (32) a
quite strongly.Now the product of two log-normaldistributionofearnings.I am indebtedto
symmetricaldistributionsis more posi- Mincer for a helpfuldiscussionof the comparison
tively skewed the higher the positive and especially for the stimulationprovided by his
work. Incidentally,his article and the
correlationbetween them,and mightbe pioneering
dissertationon which it is based cover a much
quite skewed.88The economic incentive broaderarea than has been indicatedhere.
given abler persons to invest relatively 87 For example, C. C. Craig has shown that the
large amounts in themselvesdoes seem productof two independentnormaldistributionsis

85 A sophisticated example can be found in
only slightlyskewed (see his "On the Frequency
Functionof XY," A nnals ofAMathematical
Statistics,
B. Mandelbrot, "The Pareto-Levy Law and the VII [March, 1936],3).
Distribution of Income," InternationalEconomic
Review,Vol. I (May, 1960). In a recentpaper, how- 88
Craig (op. cit.,pp. 9-10) showedthat the prod-
ever, Mandelbrot has brought in maximizingbe- uct of two normaldistributions would be moreposi-
havior (see "Paretian Distributions and Income tivelyskewedthe higherthe positivecorrelationbe-
Maximization," QuarterlyJournal of Economics, tween them,and that the skewnesswould be con-
Vol. LXXVI [February,1962]). siderablewithhighcorrelations.
48 GARY S. BECKER
frominvestmentin human capital-the olderages because thepresumednegative

smaller rC relative to X-the more i-1
would the distribution of earnings be correlationbetween -C3 and E riCi

0
dominated by the distribution of X.
would counteractthe positivecorrelation
Higher skill categories have a greater
between ability and investment.
average investment in human capital
A simple analysis of the incentive to
and thus presumablya large rC relative
investin human capital seems capable of
to X. The distribution of "unskilled
explaining,therefore,not only why the
ability," X, would, therefore,tend to
over-all distributionof earningsis more
dominate the distributionof earningsin
skewed than the distributionof abilities,
relativelyunskilled categorieswhile the
but also why earningsare more skewed
distributionof a product of ability and
among older and skilled persons than
theamountinvested,rC,would dominate
among youngerand less skilledones. The
in skilled categories. Hence if abilities
renewed interest in investment in hu-
were symmetricallydistributed, earn-
man capital may provide the means of
ingswould tend to be moresymmetrical-
bringingthe theory of personal income
ly distributedamong the unskilledthan
distributionback into economics.
among the skilled.89
Equation (32) holds only when in-
VI. SUMMARY AND CONCLUSIONS
vestmentcosts are small, which tends to
be trueat later ages, say afterage thirty- Most investmentsin human capital
five. Net earningsar earlier ages would both raise observed earnings at older
be given by ages, because returnsare added to earn-
ings then, and lower them at younger
i-1
ages, because costs are deducted from
Yj= X-j+ E rCI+ (-Cj),
0 earnings then. Since these common ef-
fectsare producedby verydifferent kinds
wherej refersto the currentyear and i of human capital, a basis is provided for
to previousyears,Ci measuresthe invest- a unified and powerful theory. The
ment cost of age i, Cj currentcosts, and analysis proceeded froma discussion of
ri the rate of returnon Ci. The distribu- specific kinds of human capital, with
tion of - Cj would be an importantde- greatest attention paid to on-the-job
terminantof the distributionof Yj since trainingbecause it clearlyillustratesand
investmentis large at these ages. Hence emphasizes the common effects,to a
our analysis would predict a smaller general theoryapplying to any kind.
(positive) skewness at younger than at The generaltheoryhas a wide variety
of importantimplications,rangingfrom
89 As noted earlier,X does not really represent interpersonaland interareadifferences in
earningswhenthereis no investmentin humancapi-
tal, but only earningswhen thereis no investment earnings, to the shape of age-earning
afterthe initial age (be it fourteen,twenty-five, or profiles,to the effectof specializationon
six). Indeed, the developmentalapproach to child- skill. For example, since earnings are
rearingarguesthat earningswould be close to zero if
therewas no investmentat all in humancapital. The gross of the return on human capital,
distributionofX, therefore, would be at least partly some personsmay earn more than others
determinedby the distributionof investmentbefore simplybecause theyinvestmorein them-
the initialage, and if it and abilitywere positively
correlated,X might be positively skewed, even selves. And since "abler" personstend to
thoughabilitywas not. investmore than others,the distribution
of earnings could be very unequal and employmentamongunskilledthanskilled
even skewed, even though "ability" workersmay resultfromthe latter hav-
weresymmetrically and not too unequal- ing morespecificcapital; or incompletely
ly distributed.To take anotherexample, vested pension plans may be a means of
learning,both on and offthe job, and insuring firms against a loss on their
other activities appear to have exactly specificinvestments.
the same effectson observed earningsas This paper has concentrated on de-
do education, training,and other tradi- veloping a theoryof investmentin hu-
tional investmentsin human capital. We man capital, withan emphasison empiri-
argue that a relevant concept should cal implications rather than on formal
cover all activities with identical effects generalization.Of course, empiricaluse-
and show that the total amount in- fulnessis the only justificationfor any
vested in a generalizedconceptofhuman theory,and although I did not try to
capital and its rate of returncan be esti- bringin even the quite limited evidence
mated from information on earnings on the role of human capital, the em-
alone. pirical workreportedin this volume,my
Some investmentsin human capital do own work,and that of many otherssup-
not affectearningsbecause costs are paid port the view that investmentin human
and returnsare collected by the firms, capital is a pervasive phenomenonand a
industries,or countriesusing the capital. valuable concept. The next few years
These "specific"investmentsrange from should provide much strongerevidence
hiringcosts to executivetrainingand are on whetherthe recent emphasis placed
more importantthan is commonly be- on this concept is just another fad or a
lieved. To take a couple of examples,we development of great and lasting im-
showed that the well-knowngreaterun- portance.

Investment in Human Capital A Theoretical Analysis

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Investment in Human Capital A Theoretical Analysis

Enviado por

Direitos autorais:

Formatos disponíveis

This PDF is a selection from a published volume from the National

Bureau of Economic Research

Volume Title: Investment in Human Beings

Volume Author/Editor: Universities-National Bureau Committee for

Volume Publisher: The Journal of Political Economy Vol. LXX, No.

Volume ISBN: 0-87014-306-9

Volume URL: http://www.nber.org/books/univ62-3

Publication Date: October 1962

Chapter Title: Investment in Human Capital: A Theoretical Analysis

Chapter Author(s): Gary S. Becker

Chapter URL: http://www.nber.org/chapters/c13571

Chapter pages in book: (p. 9 - 49)

I. INTRODUCTION prove the physicaland mentalabilitiesof

occupationsand educationclasses,3there The typical investorin human capital is

I In additionto the earlierworksof Smith,Mill, Theories of firmbehavior, no matter

that, placing special emphasis on the where W equals wages or expenditures

or a doctor trained (interned) at one Equation (7) is reduced to

investmentcosts and would correspond signs of these correlationsmight even

to be subtractedor a positive apprecia- period and equal afterwards,they would

to make the age earningscurveoftrained

ginal productivityduring the training

further demonstrated by contrasting trainingin a wide variety of skills and

firmsin competitivelabor marketshave amount in firmsprovidingthe training

be receivedelsewhere,MPt - Wt would paid for specific trainingwould be un-

some trainingcosts as well as returnsto and theireffecton wages and productivity:"Thus

If trainingwere not completelyspe- the sum of a (positive) rate measuringthe cost of

MP'+ aC = W + C, (13) of such trainingis borne entirelyby em-

ter Oi in "Labor as a Quasi-fixedFactor of Produc-

cover general declines in demand; sup- -often an extremelypowerfulone not

tirementand thus provides an incentive the major exceptions.

Moreover,any enforciblecontractcould training.The investmentapproach pro-

in a perfectlycompetitiveenvironment Market," JournalofPolitical Economy,June,1956,

productand wages in monopsoniesmightmeasure, of OccupationalLicensing" [paper givenat the Na-

used in gatheringand handlingempirical haps this is most apparent when a stu-

receivedas higherwages, so thisformally store or truck systemin nineteenth-cen-

profiles.The cause of this differenceis III. RELATION BETWEEN EARNINGS,

equate total costs and returns.In sym-

since C = XO - YO and kj = Y- Xi.

were known to occur in Y during each liM C, (XX- IYj)(I + r) i=0,

the foregoneearningsin the jth period,

turns,and internalrates has thestriking- rjCi in each succeedingperiodifthe numberofperi-

at the internalrate,r.46Total costs would amount invested in each of the firstm

So costs and the rate of returncan be

The analyticaldifference betweenthe naive defi- m-1

only be slightlyraised ifpeople remained amount invested can be distinguished

of whetherthe secular improvementin for p periods only, where p varied be-

findinvestmentsthat increaseproductiv- B. WAGE DIFFERENTIAlS AND

ity in several activities.A womann wants SECULAR CHANGES

her investmentto be useful both as a According to equation (30) the in-

Thereforeneitherwage ratios nor wage interpretationsuggestedby our analysis

fromthe effectof an autonomousincrease whelminglyindicatesa seculardeclinein rates of re-

of capital declinedrelativeto wages over culations I have made suggestthat there

between investmentand returnthe less ityAnalysisofChoicesInvolvingRisk," reprintedin

D. CAPITAL MARKETS AND KNOWLEDGE 1. Since large expenditureswould be

fora firmhe is startingratherthan in a The eighteen-year-oldin our example

sons are especially prone to be ignorant Differencesin earningsamong persons,

the age-earningsprofile]0 to estimate empiricallythe elasticity of

4. A secular increase in average earn- sonality, persistence, and intelligence.

whereC measurestotal investmentcosts, One is that the tendencyforabler per-

large amounts in themselvesdoes seem productof two independentnormaldistributionsis

frominvestmentin human capital-the olderages because thepresumednegative

would the distribution of earnings be correlationbetween -C3 and E riCi

Você também pode gostar