The Strengths and Limitations of Human Capital Theory in Educational Research and Policymaking

Introduction

       Human capital theory (HCT) is one of the most commonly used economic frameworks in educational research and policymaking. In this short post, I briefly describe the HCT framework and explore its strengths and limitations in educational research and policymaking.

What is Human Capital Theory?

        HCT is a framework that examines the relationships between education, economic growth, and social well-being. It is an extension of the capital concept and posits that expenditures on education, job training, and health are capital investments that will yield economic and social returns at the individual and societal levels. Education and training are assumed to lead to greater productivity, which is ultimately translated into economic returns such as higher wages and increased GDP.  Early applications of HCT focused primarily on the relationship between amounts of education and economic/social returns, but recent developments in the literature suggest that the quality of education (e.g., how educational time is spent) and when educational investments are made (e.g., early childhood vs. secondary education) are critical in the process of human capital formation.  Human capital itself is a composite of an individual or workforce’s knowledge, skills, and life experiences, and higher levels of human capital are expected to yield increased wages and GDP, benefitting individuals and society as a whole..

Strengths of Human Capital Theory

        A major strength of HCT is that it helps policymakers and researchers evaluate the relationships between education and training as inputs and economic and social benefits as outputs. Extensive empirical research within the HCT framework suggests that increased amounts of schooling are associated with higher individual wages, GDP growth, higher rates of civic participation, lower crime rates, and better health outcomes. This research offers policymakers a lens for evaluating the relative efficiency of public investments in programs that encourage more schooling. The framework can also contribute to more effective policy development by helping policymakers understand the amounts and characteristics (e.g. quality) of education and training that matter most for achieving desired outcomes such as economic growth and increased levels of civic participation.

        Another strength of HCT is that it provides a useful lens for understanding how policy can be developed to incentivize individuals’ investment in their own education. Pursuing education involves both costs (e.g., forgoing potential earnings in the present) and benefits (e.g., higher wages in the future) at the individual level. By using HCT to understand what these costs and benefits are, policymakers can more effectively develop policies such as student loan and dual enrollment programs to change individuals’ cost/benefit calculations (e.g., by reducing short-term costs associated with educational investments) and increase their likelihood of pursuing education.

        HCT can be used to answer questions about the optimal levels of individual/social investments in education, the kinds (e.g., quality) of investments that are most productive, and when the investments are best made. It is also useful for answering questions about the costs and benefits for individual investments in education and the types of policy interventions that reduce individual costs associated with educational investments.

Limitations of Human Capital Theory

        A limitation of HCT is that it assumes education increases productivity in the workplace, resulting in higher individual wages, but it provides little insight into the processes through which education and training are translated into higher wages. In statistical models, education and training account for about 30 percent of the variance in individual wages, which suggests HCT leaves a significant percentage of wage variability unexplained. A variety of “middle range” theories (e.g., screening and credentialism) attempt to explain the other 70 percent of individual wage variability, and some of these theories examine the relationship between educational credentials (e.g., a bachelor’s degree) and earnings.  Many of these “middle range” theories focus on the social and cultural contexts in which employment decisions are made and suggest numerous factors besides productivity (e.g., cultural and social capital) are involved in the relationship between education and higher wages. It is thus critical for policymakers to consider alternative frameworks in conjunction with HCT to more fully understand the relationship between education and private economic returns such a higher wages.

        A related limitation is that upper-level applications of HCT (e.g., at the national or state levels) treat education as a relatively homogenous input. These applications assume that higher levels of educational attainment and quality will yield greater productivity and wages across the board. Such treatment of education is problematic because the process of human capital formation varies for individuals and groups. People learn differently, and a “quality” education in one context may prove ineffective in another. The investments required to achieve a desired outcome in urban schools are necessarily different from those in suburban districts because of the unique characteristics of their student populations. It is thus incumbent upon policymakers to consider the context dependency of human capital investments to ensure efficient allocation of resources and effective policy interventions at the national and state levels.

Further Reading

Becker, G. (1993). Human capital: A theoretical and empirical analysis with special reference to education.(3rd Ed.). Chicago, IL: University of Chicago Press.
Dee, T. (2004). “Are there civic returns to education?”Journal of Public Economics, 88, 1697-1720.
Eide, E. & Showalter, M. (2010). Human capital. In D. Brewer & P. McEwan (Eds.)
Economics of Education (pp. 27-32). San Diego, CA: Elsevier.
Hanushek, E. A. (2002). The Seeds of Growth. Education Next, 2(3), 10–17.
Hanushek, E. & Wosmann, L. (2010). Education and economic growth. In D. Brewer &
P. McEwan (Eds.) Economics of Education (pp. 60-67). San Diego, CA: Elsevier.
Schultz, T. W. (1961). Investment in human capital. The American Economic Review, 51(1), 1–17.