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Special Section: Essays in honor of Gary Becker
Gary Becker's work on "human capital" started around 1960. It was motivated by the rising interest in economic growth at the time. As stated in the introduction to the first edition of his book, Human Capital, "The origin of this study can be traced to the finding that a substantial growth in incomes in the US remains after the growth of physical capital and labor has been accounted for". 1This unexplained residual suggested to several researchers that unmeasured features of the quality of the labor force must also be brought into consideration.2While econometricians such as Edward Denison, Dale Jorgenson, and Zvi Griliches turned to seek better data that would reduce the scope of the unexplained residual,3Becker constructed a detailed and original theory regarding the possible effects of a major unobserved and all inclusive factor, termed, human capital, would have on observed outcomes such as wages and education and their variation over time and among individual types. Most of the theoretical results reported in the three editions of Human Capital, 1964, 1975, and 1995 are already anticipated in a single early paper that was published in the Journal of Political Economy in 1962. 4
Broadly defined, human capital is the collection of productive skills embodied in a person that can be used to generate earnings in the labor market and to augment household's consumption options. It is a dynamic concept, as individuals can choose to invest in their own human capital and this investment decision can be analyzed by economic tools that are usually applied to financial investments based on forward looking considerations. The exception being that individuals can utilize their human capital at work or in the household but cannot sell or buy it in the market place.
Becker considered two different types of investments in human capital that influence wages: schooling and learning on the job. In both cases, finite life together with the inability to sell human capital, imply a decreasing rate of investment in human capital over the life cycle. We thus observe that schooling occurs mainly early in life and that life-time wage profiles are concave as human capital produced on...