Investigación en Capital Humano Becker

8/17/2019 Investigación en Capital Humano Becker

1/42

Investment in Human Capital: A Theoretical AnalysisAuthor(s): Gary S. BeckerSource: The Journal of Political Economy, Vol. 70, No. 5, Part 2: Investment in Human Beings(Oct., 1962), pp. 9-49Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/1829103 .

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2/42

INVESTMENT IN HUMAN

CAPITAL:

A

THEORETICAL ANALYSIS'

GARY S. BECKER

Columbia

University nd

National Bureau of Economic

Research

I. INTRODUCTION

SOME

activities

rimarilyffect u-

ture well-being,while others have

their main impact in the present.

Dining is an example of the latter,while

purchase of a car exemplifies he former.

Both earnings and consumption an be

affected:on-the-job training primarily

affects arnings,

new

sail boat primari-

ly affects consumption, and a college

education is said to affect oth. The ef-

fectsmay operate

either

hrough hysical

resources, uch as a sail boat, or through

human resources, uch as a college edu-

cation.

This

paper

is

concerned with

activities that influencefuture real

in-

come

through

he

mbedding

f

resources

in people. This is called investing in

human capital.

The many ways to invest include

schooling, on-the-job training, medical

care,

vitamin

consumption,

nd

acquir-

ing information about

the

economic

system.They

differn

the relative

ffects

on

earnings

and

consumption,

n the

amount

of resources

typically nvested,

in the size of returns, nd

in

the

extent

o

which the connection between invest-

ment

and return

s

perceived.

But all

im-

1

am

greatlyndebted

o the Carnegie

Corpora-

tion ofNew

York for

he

support

givento the Na-

tional

Bureau

of

Economic

Research o study nvest-

ment

n

education

nd other

kinds

ofhuman

capital.

I benefited

reatly rom

many discussionswith my

colleague

JacobMincer,

nd also withotherpartici-

pants

in

the

Labor

Workshop

f

ColumbiaUniver-

sity.Although

many persons

offered aluable com-

ments n thedraft

repared or he conference,

am

especially indebted to the detailed comments of

Theodore

Schultz,

GeorgeStigler, nd Shirley

John-

son.

prove the physical nd mentalabilitiesof

people and thereby raise real income

prospects.

People differ substantially in their

economic well-being,both among coun-

tries and among familieswithin a given

country.For a while economistswere re-

lating these differences rimarily o dif-

ferencesnthe amount of physicalcapital

since richer people had more physical

capital than others. It has become in-

creasingly vident,however, rom tudies

of income

growth2 hat factors

other

than physical resources play a larger

role

than formerly elieved, thus focus-

ing attention on less tangible resources,

like the knowledgepossessed. A concern

with investment in human capital,

therefore,

ies in

closely

with

the new

emphasis on intangible resources and

may

be

useful

n

attempts

to

understand

the

nequality

n

income

among people.

The original aim of my study was to

estimate

the

money rate

of return to

college

and

high-school

ducation

in

the

United States.

In

orderto set these esti-

mates

in

proper

context

I

undertook a

brief ormulationfthetheory f nvest-

ment in

human capital.

It

soon

became

clear to

me, however,

that more

than a

restatement was called for: while

im-

portant

and

pioneering

work

had been

done on

the

economic return

o

various

2

The evidencefor the

United States

appears to

showthat the

growth

n

capital

per capita

explains

onlya

small

part

of the

growthn per capita

income

and that

the growth n

"technology"

explainsmost

of t.On this ee

S. Fabricant,

Economic rogress

nd

EconomicChange:34thAnnualReport f Ie National

Bureau

of EconomicResearch

New

York: National

Bureau

of

Economic

Research, 1954).

9


3/42

1()

GARY S. BECKER

occupations

nd education

classes,3 here

have been few, f

any, attemptsto treat

the process of

investing n people from

a general

viewpointor to

work out

a

broad set of empirical implications. I

began

then to

prepare

a general

analysis

of nvestment

n human capital.

As the work progressed,

t

became

clearer nd clearer

thatmuch more than

a

gap

in

formal conomicanalysis

would

be filled,for the

analysis of human

in-

vestment ffered

unified xplanation

of

a wide range of empirical

phenomena

whichhad either

been given

ad hoc

nter-

pretationsor had baffled nvestigators.

Among

hese are the following:

1)

Earn-

ings typically

ncrease with

age at a de-

creasingrate. Both

the rate of increase

and

the

rate of

retardation

tend to be

positively

elated

to the level of

skill. 2)

Unemploymentrates

tend to be nega-

tively related

to the level of

skill.

(3)

Firms

in

underdeveloped

countries

ap-

pear

to be

more

"paternalistic"

toward

employees han those ndevelopedcoun-

tries. (4) Younger

persons change jobs

morefrequently

nd receive

more school-

ing and on-the-job

trainingthan older

personsdo. (5)

The distribution

f earn-

ings

is positively

skewed, especially

among professional

and

other skilled

workers.

6)

Abler

personsreceive

more

education

and

other

kinds of training

than others. 7) The division of labor is

limitedby the

extent of the

market. 8)

I

In addition to the earlierworks

f

Smith,Mill,

and Marshall, ee

H.

Clark,

Life Earnings

n

Selected

Occupations

n the

U.S.

(New

York:

Harper

&

Bros.,

1937); J.

R.

Walsh, "Capital Concept Applied to

Man," Quarterly ournal of Economics,February,

1935; M. Friedman nd S. Kuznets, ncomefromn-

dependentrofessional ractice New

York:

National

Bureau of EconomicResearch, 1945);

G.

Stigler nd

D.

Blank,The

Demand and

Supply ofScientific er-

sonnel New York: National Bureau of Economic

Research,1957); and T. W. Schultz, Investment n

Man:

An

Economist's View," Social ServiceReview,

June,

1959.

The

typical nvestor

n human

capital

is

more mpetuous

and thus

more ikely

to

err han

s the typical

nvestor

n

tangible

capital.

What

a diverse nd possibly

ven

confusing rray Yet all these as well as

many

other

importantempirical

mpli-

cationscan

be derived

fromverysimple

theoretical

arguments.

The purpose

of

this paper

is

to

set

out

these arguments

in some generality,

with the

emphasis

placed on

empirical implications,

al-

though

little

empirical

material

is

pre-

sented. My

own empiricalwork

will ap-

pear

in a later study.

First, a lengthydiscussionof on-the-

job

training

s

presented

nd

then,

much

more

briefly,

iscussions f nvestment

n

schooling, nformation,

nd health.

On-

the-job

training

s

dealt

with so elabo-

ratelynot because

it is more

important

than

other

kinds

of nvestment

n

human

capital-although

its mportance

s

often

underrated-but

because

it

clearly

llus-

trates

the effectof human

capital

on

earnings,employment, nd other eco-

nomic

variables.

For

example,

the

close

connection

between

foregone nd direct

costs

or

the

effect f

human

capital on

earnings

at

different ges is vividly

brought

ut.

The extended discussion

of

on-the-job

trainingpaves

the

way

for

much briefer iscussions

f

otherkinds

of

investment

n

human

beings.

II. DIFFERENT KINDS OF INVESTMENT

A. ON

THE

JOB

Theories

of firmbehavior,no matter

how

theydiffer

n

other

respects, lmost

invariably gnore

he

effect f

the

produc-

tive process

itself on workerproductiv-

ity.

This

is

not

to say

that no one

recognizesthat productivity

s

affected

by

the

ob

itself;

but

the

recognition

as

not

been

fonnalized, incorporated

nto

economic analysis,

and

its

implications

worked

out.

We

now intend to

do

just


4/42

INVESTMENT IN HUMAN

CAPITAL: A

THEORETICAL

ANALYSIS 11

that,

placing special emphasis

on the

broader

economic mplications.

Many workers

ncrease their produc-

tivity

by earning

new skills

and perfect-

ing old ones while on the job..

For ex-

ample,

the

apprentice

usually learns

a

completely

ew

skill

while

the internde-

velops

skills

acquired

in

medical

school,

and both

are moreproductive fterward.

On-the-job

training, therefore,

is a

process

that

raises

futureproductivity

and differs

rom

chool training

n

that

an

investment

s

made

on the

ob rather

than

in an institution hat specializes

n

teaching.Presumably,future roductiv-

ity can be improved

only

at a cost, for

otherwise

here

would be an

unlimited

demand

for raining.ncluded

in

cost

are

a value placed

on the

time

and

effort

f

trainees,

the

"teaching"

provided by

others,

nd

the

equipment nd materials

used.

These are

costs

in

the sense

that

they

could

have been

used

in

producing

current

utput

if they werenot used

in

raisingfuture utput.The amount spent

and the duration

of the

trainingperiod

dependpartly on

the type of

training-

more

is spent for a longer

time

on

an

intern

han on an

operative-partly

on

productionpossibilities,

and partly

on

the

demand

fordifferent

kills.

Each employee

s

assumed

to be hired

for specified

ime

period in

the imiting

case this

period pproaches

zero), and

for

the moment both labor and product

markets

are

assumed

to be perfectly

competitive.

f

therewere

no on-the-job

training,wage

rates would be given

to

the firm nd wouldbe independent

f

ts

actions.

A

profit-maximizing

irm

would

be

in

equilibrium

whenmarginal roducts

equaled

wages,

that is,

when

marginal

receipts

equaled marginal

expenditures.

In symbols

MP=W,

(1)

where

W equals wages

or

expenditures

and MP

equals the marginalproduct or

receipts. Firms would not

worry too

much

about the relationbetween labor

conditions in the present and future

partly because workers

were

only

hired

forone

period, nd partlybecause wages

and

marginal products

n

future

periods

would

be independent f a firm's urrent

behavior.

t

can therefore

egitimately

e

assumed

that workershave

unique mar-

ginal

products (for given amounts of

other

nputs) and wages

in

each

period,

which

are, respectively,

he

maximum

productivityn all possible uses and the

marketwage rate. A more

complete set

of

equilibrium onditions

would be the set

MPt=

Wt,

(2)

where t refers

to the

tth

period.

The

equilibrium

osition

or

achperiodwould

depend

only

on the

flowsduring

that

period.

These conditions re alteredwhen

ac-

count s taken of on-the-job raining nd

the

connection

hereby reated between

present nd future eceipts nd

expendi-

tures.

Training might

lower current

receipts

and

raise

current xpenditures,

yet firms

ould profitably

rovide

this

trainingf

future eceiptswere sufficient-

ly raised

or future

expenditures

suf-

ficiently

owered.

Expenditures during

each period need not equal wages,

receipts

need not

equal

the

maximum

possible

productivity,

nd

expenditures

and

receiptsduring

ll

periods

would be

interrelated. The set of

equilibrium

conditions summarized

in

equation (2)

would be

replaced by an

equality

be-

tween the

present

alues of

receipts

and

expenditures.

f

Et

and

Rt

represent

x-

penditures

nd

receiptsduring period t,

and i the marketdiscountrate,then the

equilibriumcondition

can

be written s


5/42

12 GARY S. BECKER

Rn

I

t

n

-I

E t

v

(3)

0

(I +i)

t=o

+

where

n

represents

the

number of

periods, and R, and E, depend on all

other receipts and

expenditures.

The

equilibrium

condition of

equation (2)

has been

generalized, for

if

marginal

productequals wages

in

each

period,

the

present value

of the

marginal product

stream would

have

to

equal

the

present

value

of the

wage stream.

Obviously,

however, he

converseneed not

hold.

If trainingweregiven

only during

he

initial period, expenditures during the

initialperiod

would equal wages plus

the

outlay

on

training, xpenditures

during

other

periods

would

equal

wages alone,

and

receipts

during

all

periods

would

equal marginal

products. Equation

(3)

becomes

n-i

MRt

MPO

_

-

O

+1

(

1

+0Z

t

(4)

=WO

k

E

t)tX

where

k

measuresthe

outlay

on

training.

If a new term

s defined,

G=

EM1-Wt

(5)

t=__

(1

+iW

equation

(4)

can be written

s

APo

P+G=Wo+k.

(6)

Since

the term

k

only

measures

he

actual

outlay

on

training

t does

not

entirely

measure

training costs, for

excluded is

the time that

a

person spends on this

training,

ime

that

could

have been

used

to

produce

current

output.

The

differ-

ence between

what could

have beenpro-

duced,

call

this

MPo

and

what is

pro-

duced, MPo, is the opportunity ost of

the

time

spent

n

training.

f

C is

defined

as the

sum of

opportunity

osts and

out-

lays on

training, 6)

becomes

MP'+G=Wo+C.

(7)

The term G, the excess of future

receipts ver future

utlays, s a

measure

of the return

o

the firm rom

providing

training;

and, therefore,

he difference

betweenG and C

measures

the

difference

between he return

rom,

nd the

cost

of,

training.Equation

(7) shows

that mar-

ginal

productwould equal

wages in

the

initial period only

when the return

equals

costs,

or

G

=

C;

it

would

be

greateror less than wages as the return

was smalleror greater

han costs. Those

familiarwith

capital theory

might rgue

that this

generalization

of the

simple

equality between

marginal productand

wages

is

spurious because a full

equi-

librium

would require

equality between

the return

from n

investment-in

this

case,

made on the

ob

and

costs.

If

this

implied that G

=

C,

marginal product

would equal wages in the initialperiod.

There

is

much to be said for

the rele-

vance of a

condition

quating

the

return

from n investment

withcosts, but such

a

condition oes

not

mply

hat G

=

C or

that

marginal

product equals

wages.

The

following

discussion demonstrates

that great care

is

required

n the

applica-

tion of this

condition to

on-the-job

investment.

1. General. Our treatment fon-the-

job

trainingproduced

some

general

re-

sults

summarized

n

equations (3)

and

(7)

of

wide

applicability,

ut more con-

crete

results

require more

specific

as-

sumptions. n

this and the

following ec-

tion

two

types

of

on-the-job raining

re

discussed

in

turn:

general

and

specific.

General

training

s useful

n

many

firms

in

addition to the firm

roviding t, as a

machinist trainedin the

army findshis

skills of

value

in

steel and

aircraft

irms,


6/42

INVESTMENT

IN

HUMAN CAPITAL:

A

THEORETICAL

ANALYSIS

13

or

a doctor trained (interned)

at one

hospital

findshis

skills useful

at other

hospitals.

Most on-the-job

raining

pre-

sumably

increases

the future

marginal

productofworkersn the firm roviding

it,

but general training would also in-

crease theirmarginal

product

in

many

other irms s well.

Since n a competitive

labor

market

hewage

rates paid by

any

firm re determined

y

marginalproduc-

tivities n other

firms, uture

wage rates

as well as marginal

products

would in-

crease to

firms

rovidinggeneral

train-

ing. These

firms ould

capture

some of

the return fromtraining only if their

marginal product

rose by

more than

their

wages.

"Perfectly

eneral"

training

would

be equally

useful in

many

firms

and marginal

products

would

rise

by

the

same

extent

n

all of them.

Consequent-

ly,

wage rates would

riseby

exactlythe

same

amount

as the marginal

product

and

the firmsproviding

such

training

could

not

capture

any of

the

return.

Why,then,do rationalfirms n com-

petitive

labor

marketsprovide

general

training,for why

provide

training

that

brings no

return?

The answer

is

that

firms would provide

general

training

only

if

they

did not have

to

pay any of

the costs. Persons receiving general

training

would

be willing to

pay

these

costs since

trainingraises their

future

wages.

Hence

the

cost as well

as

the

re-

turn from general trainingwould be

borne

by

trainees,not

by firms.

These and other

mplications

of gen-

eral

training

can

be

more

formally

demonstratedwith

equation

(7). Since

wages

and

marginal

products

are raised

by

the same

amount,

MP,

must

equal

W,

for

all

t

=

1, .. .n-1

,and

there-

fore

__

__

0MP- t=?.

( 8)

(1+it

-

t

t=1

(

8

Equation

(7) is reduced

to

MP,=W

WO+C,

(9)

or

VO=MP,

-C.

(10)

In terms

of

actual

marginal

product

MPo=Wo+

k,

(9')

or

Wo=MPo-k.

(10')

The wage

of

trainees

would

not equal

theiropportunity

marginalproduct

but

would

be less by

the

total

cost of

train-

ing. n otherwords, mployeeswouldpay

for general

training

by

receiving

wages

below

their

current

opportunity)

pro-

ductivity.

quation

(10)

has

manyother

implications,

nd the

rest

of this

section

is

devoted

to developing

the more

im-

portant

ones.

Some might

rgue

that

a

really

"net"

definition

f marginal

product

obtained

by

subtracting

training

costs

from

"gross" marginal product must equal

wages

even for

trainees.

Such

an

inter-

pretation

of

net productivity

ould

for-

mally

ave the

equality

between

marginal

product

nd wages

here,

but later

show

(pp.

18-25)

that it

cannot always

be

saved.

Moreover,

regardless

f which

n-

terpretation

s used,

training

ostswould

have

to be

included

n

any

study

ofthe

relation

between

wages

and

productivity.

Employeespay forgeneralon-the-job

training

by

receiving

wages

below what

could

be received

elsewhere.

Earnings"

during

the

trainingperiod

would

be

the

difference

etween an

income

or

flow

term,

potential

marginal

product,

nd

a

capital

or

stock

term,

training

costs,

so

that

the

capital

and

income

accounts

would

be

closely

intermixed,

with

changes

in

either affecting

wages.

In

otherwords,earningsof personsreceiv-

ing

on-the-job

training

would

be

net

of


7/42

14

GARY S. BECKER

investment osts

and would

correspond

to

the definition f net earnings

used

throughout

his paper, which

subtracts

all investment osts

from"gross"

earn-

ings.Therefore,

ur departure

with this

definition f

earningsfrom he

account-

ing conventions

used for transactions

n

material

goods-which

separate income

from

capital accounts

to prevent

a

transaction

in

capital from

ipso factor4

affectinghe income

side

is not capri-

cious

but is grounded

n

a

fundamental

differenceetween

hewayinvestment

n

material nd human

capital are

"written

off."The underlying ause of thisdiffer-

ence

undoubtedly

s the

widespread

re-

luctance to

treat people as

capital and

the accompanying

endencyto treat

all

wage receipts

s earnings.

Intermixing

he capital

and income

accounts

could

make the

reported

"in-

comes"

of

trainees nusually ow

and

per-

haps

negative, even

though

theirlong-

run or

lifetime

ncomes

were

well

above

average. Since a considerablefraction f

youngpersons

receive

ome

training,

nd

since

trainees would

tend to have

lower

current

nd

highersubsequent

earnings

than other youth,

the correlation

be-

tween

current

onsumption

nd

current

earnings

of

young

people'

would

not

only

be much

weaker

than the

correla-

tion with long-run

earnings,

but

the

4

Of course, Eshift etween ssetshavingdiffer-

ent productivities

ould affect

he income

account

on material

goods even

with current

accounting

practices.

I

I say "young people"

rather han "young

fam-

ilies" because

as J.Mincer

has shown

in

a paperto

be published

n a

NationalBureau

ofEconomic

Re-

search

conference

olumeon

labor

economics),

the

labor-force

articipation

f wives is

positively

or-

related

with thedifference

etween

husbands'

ong-

run and current

ncome.

Participation

of wives,

therefore,

akes

the correlation

etween

family's

current nd a husband's long-runncomegreater

than thatbetween

husband's

currentnd

long-run

income.

signs

of these

correlations

might even

differ.6

Doubt

has been

cast on the

frequent

assertion

that no

allowance

is

made in

the incomeaccounts

for

depreciation

n

human capital.7

A depreciation-type

item s

deducted,

at

least from

he earn-

ings due

to on-the-job

training,

for

the

costwould

be deducted

during he

train-

ing period.

Depreciation

on

tangible

capital

does not bulk

so large

in any one

period

because

it is

usually

"written ff"

or depreciated

duringa period

of

time

designed

to approximate

its

economic

life. Hence human and tangible capital

appear

to

differmore

n the time

pattern

of depreciation

than

in its

existence,8

and

the

effect n

wage

income

of

a

rapid

"write-off"

f

human

capital

is

what

should

often

be

emphasized

and studied.

Our

point

can

be

put

differently

nd

more rigorously.

he

ideal

depreciation

on

a

capital

asset

during

any period

would

equal

its

change

in value

during

theperiod.In particular, f value rose,a

negative

depreciation

term would

have

6

A difference

n signs

s impossible

n Friedman's

analysis

of

consumer

behavior

because

he assumes

that

transitory

nd long-run

that

is,

permanent)

incomes

are uncorrelated

see

his A Theory

f

the

Consumption

unction Princeton,

N.J.:

Princeton

University

ress,

1959]);

we

are

suggesting

hat

they

maybe

negatively

orrelated

oryoung

persons.

I

See,for

xample,

A.

Marshall,

Principles

f

Eco-

nomics8thed.;

New York: Macmillan

Co., 1949);

C.

Christ, Patinkinon Money, nterest, nd Prices,"

Journal

of

Political

Economy,

August,

1957, p.

352;

and

W.

Hamburger,

The

Relation

of Consumption

to

Wealth

and

the Wage

Rate,"

Econometrica,

anu-

ary,

1955.

8

In a recent

paper,

R. Goode

has argued

(see

"Educational

Expenditures

nd

the ncome

Tax,"

in

Selma J.

Mushkin ed.],

Economics

fHigher

Educa-

tion [Washington:

United

States

Department

of

Health,

Education,

and Welfare

(forthcoming)])

that

educated persons

hould

be permitted

o

sub-

tract

from ncome

a depreciation

llowance

on tui-

tion payments.

uch

an allowance

s

apparently

not

requiredfor on-the-job raining osts; indeed,one

might

rgue,

on

thecontrary,

hat

too much

or

too

rapiddepreciation

s

permitted

n such

investment.


8/42

INVESTMENT

IN

HUMAN

CAPITAL:

A THEORETICAL ANAILYSIS

15

to be subtracted or a positive apprecia-

tion termadded to the income from

he

asset. Since training osts would

be

de-

ducted from arningsduring

he

training

period, he economic value" of a trainee

would at first ncrease rather than de-

crease with

age,

and

only

later would

it

begin

to decrease.9

Training has an important effect n

the

relation between earnings

and

age.

Suppose

that untrained

persons

received

the

same earnings regardless

of

age,

as

shown by the horizontal

line

UU

in

Figure 1. Trained persons would

receive

lowerearnings uring hetraining eriod

because training s paid for then, and

higher arnings t later ages because the

return s collected then. The

combined

effect

f paying for nd

collecting

he re-

turnfrom raining

n

thisway

would

be

to make the

age earnings urve

of trained

persons,

shown

by

TT

in

Figure 1,

steeperthan that of untrained

persons,

the

difference eing greater the greater

the cost of,and return rom, he invest-

ment.

Not

only

does

training

make the

curve steeper but, as indicated by

Figure 1, also more concave;

that is, the

rate of increase

in

earnings s

affected

more at younger han at older

ages. Sup-

pose,

to take

an extreme

ase,

that train-

ing

raised

the level of marginalproduc-

tivity

but had

no

effect n the

slope,

so

that themarginalproductivity ftrained

persons

was

also

independent

of

age.

If

earningsequaled marginal

product,

TT

would

merely

be

parallel

to

and higher

than

UU, showing

neither

lope

nor con-

cavity. Since, however,

earnings of

trained

persons

would

be

below

mar-

ginal productivityduring

the

training

9

n

my study

for

the National Bureau

of

Eco-

nomic Research I try to measure the relation be-

tween depreciation nd age forseveral education

classes.

period

and

equal

afterwards, hey

would

rise sharply

at the end of

the training

period

nd

then evel off as shownby

the

dashed line

T'T'

in

Fig. 1), imparting

concave appearance to the curve as a

whole.

In this

extreme

case

an

extreme

concavityappears;

in less extreme ases

the principlewould

be

the

same and the

concavity

morecontinuous.

Foregone earnings

are an important,

althoughneglected,

ost

of much

human

capital

and should

be

treatedon the same

footing

s

direct utlays. ndeed,

all costs

appear as foregone

arnings

to

workers

T

zc/ I,_

U

AGE

FIG. 1

receiving n-the-job

raining; hat is,

all

costs

appear

as

lower

earnings han could

be received elsewhere, although

direct

outlays,

C, may really be an

important

part

of costs. The arbitrariness f the

division

between

foregone and direct

costs and the resulting advantage

of

treating otal costs

as a whole" can

be

10

The equivalence between foregone nd

direct

costs pplies to consumption s well as to nvestment

decisions.

A

household an

be

assumed

o maximize

utility unction

U(K1, X

2,

*

X)

X

i

. X being consumption oods, subject to the

constraint

P-ix=wV

h - E lX1)?

+

Y

where

pi

is the marketprice

of

the th

good,

I14

he

average wage rate, y non-wage ncome,

hI

he

total


9/42

16

GARY

S.

BECKER

further demonstrated by

contrasting

school and on-the-jobtraining.

Usually

only

the direct

cost of

school training s

emphasized, even though the foregone

cost is sometimes as withcollege educa-

tion) an importantpart of the total. A

shiftof

training

from chools

to

on the

job would,however, everse he emphasis

and make all costs appear as foregone

earnings, ven when direct

outlays were

important.

Income maximizing

firms n competi-

tive labor markets would not pay the

cost of general training nd

would pay

trained persons the market wage. If,

however, raining osts were

paid, many

persons would seek training,

few would

quit during he training eriod,

nd labor

costs would be relativelyhigh.

Firms

that did not pay trained persons the

marketwage would have

difficultyatis-

fying heir kill requirements

nd would

also tend

to

be

less

profitable

han other

firms. irms that both paid fortraining

and lessthanthemarketwage for rained

persons

would

have

the worst of

both

worlds,

for

hey

would

attract

too

many

trainees nd too

few trainedpersons.

These

principles

have been

clearly

demonstratedduringthe last few years

in

discussions of problems

n recruiting

military personnel.

The military offers

number fhours vailable for ither

onsumption

r

work, nd hj the numberof hoursrequired o con-

sume a unit ofthe

th good. By

transposing

erms

the

constraint an

be written s

2(p?+Whti))X

=Wh+y

.

The total

cost or priceofconsuming unitofthe th

good s

the

umof

two

components:

he

market

rice

or direct

outlayper unit,

pi,

and

the foregone arn-

ingsper

unit,

Whi.

expect o show nanother aper

that this formulation f

household decisions gives

extremely seful

nsights

nto number f

mportant

economic

problems,

uch as the

choice between a-

bor and "leisure," the effect f price control on

prices, he

roleofqueues, and the

cause ofdifferences

among

ncome lasses

n

priceelasticities

f

demand.

training

n

a wide

varietyof skills and

many-such

as piloting nd

machinere-

pair-are

veryuseful n the

civilian sec-

tor. Training

s

providedduring

part or

all ofthefirst nlistment eriodand used

duringthe remainder

f the first eriod

and hopefully uring ubsequent

periods.

This hope, however,

s thwartedby the

fact that

re-enlistmentates

tend to be

inversely related

to the

amount of

civilian-type skills

provided

by the

military.11ersonswith these

skills eave

the militarymore

readilybecause they

can

receive much higher

wages in the

civilian sector. Net militarywages for

those receiving raining re

higherrela-

tive

to civilianwages

during hefirst han

during

ubsequentenlistment

eriodsbe-

cause training

costs

are

largely paid by

themilitary.Not

surprisingly,herefore,

first-term

nlistments or killed

obs

are

obtained

much more

easily

than

are re-

enlistments.

The

military

s

a conspicuous

example

of an organizationthat both pays at

least part of training

osts

and does not

pay

market

wages

to skilled

personnel.

t

has had,

in

consequence,relatively

asy

access to

"students"

and heavy

losses of

"graduates."

Indeed, its graduates

make

up

the

predominate art

of the supply

n

several civilian occupations.

For ex-

ample,

well

over

90

per

cent of

United

States

commercial

irline

pilots

received

much of their training in the armed

forces.

The

military,

f

course,

s

not

a

commercial organization

judged by

profits

nd losses and

has

had

no

diffi-

culty

surviving

nd even thriving.

What

about

the

old

argument

that

" See

Manpower

Management

nd Compensation

(Washington:

Government

Printing

Office, 957),

Vol. I, Chart

3,

and the accompanying

discussion.

The military ot

onlywants

toeliminate

he nverse

relation utapparentlywould iketo createa strong

positiverelation

because

they

have such a

large n-

vestment

n heavily

trainedpersonnel

see ibid.).


10/42

INVESTMENT IN HUMAN

CAPITAL: A

THEORETICAL

ANALYSIS

17

firms n competitive abor marketshave

no incentive o

provide on-the-job rain-

ing becausetrainedworkerswould be bid

away by otherfirms?Firms that train

workers re supposed to impart external

economies to other firms because the

latter can

use

theseworkersfree of any

training charge. An analogy with re-

search and

development s often drawn

since a

firm

developing a process

that

cannot be patentedor

kept secret would

impart external economies to competi-

tors."2 his

argument nd analogy would

apply

if firmswere

to pay training osts,

for they would suffer "capital loss"

whenever

rained

workerswere bid

away

by

otherfirms.

irms can, however,

hift

training oststo

trainees nd have an

in-

centive

to do so

when faced

with

compe-

titionfortheir

ervices.

The difference

etween

nvestment

n

training

and

in

research and

develop-

ment can be

put very simply.Without

patents

or

secrecy,

firms

n

competitive

industries cannot establish property

rights n

innovations, nd these innova-

tions

become fair

game

for all

comers.

Patent systems

try to

establish these

rights o

that

incentives an

be

provided

to

invest

n

research.

Propertyrights

n

skills,

on the

other

hand,

are automati-

cally vested, for

a skill cannot

be used

without

permission

of the

person pos-

sessing

t.

This

propertyright

n

skills

is thesource ofthe incentive o invest n

training

and

explains why

an

analogy

with

unowneq

nnovations

s

misleading.

2.

Specific.-Completelygeneral rain-

ing increases the

marginal productivity

of

trainees

by

exactly

the

same

amount

in

firms roviding he training s

in

other

firms.

learly some kinds

of training

n-

crease

productivity by a different

12

These arguments an be found nMarshall, op.

cit., pp.

565-66, although he

compares

training o

land-tenure ystems.

amount

in

firms

providing

the

training

than in other firms.Training that in-

creases

productivitymore

in

firms

pro-

viding

it

will

be

called

specific raining.

Completely specifictrainingcan be de-

fined s training hat has no effect n the

productivityof trainees that would be

useful n in otherfirms.Much

on-the-job

training

is

neither completely specific

not

completely general but increases

productivitymore

in

firmsproviding t

and

falls within

he

definition f specific

training.

The rest ncreases

productivity

by at

least as much

in

other firms nd

falls within definition f general train-

ing. The previous section discussed gen-

eral training and this one will cover

specific training.

A

few illustrations

of

the

scope

of

specific training are pre-

sented

before a formal

analysis

is de-

veloped.

The

military offerssome forms of

training

hat are

extremely seful

n

the

civilian sector,as already noted. Train-

ing is also offered hat is only of minor

use

to civilians:

stronauts, ighter ilots,

and missile

men

all illustrate this to a

greater

or

lesser extent. Such training

falls

within

he

scope

of

specific raining

because

productivity s raised

in

the

military

ut not

(much)

elsewhere.

Resources

are usually spent by firms

in

familiarizing ew employeeswith heir

organization,

and

the

knowledge so

acquired is a formof specific training

because

productivity

s

raised more

in

the

firms

cquiring

the

knowledge than

in

other

firms.

Other kinds of hiring

costs,

such as

employment gency fees,

the

expenses

ncurred

y

new

employees

in

finding obs (what Stigler calls in his

paper

in

this

Supplement

the

"costs of

13

To judge

by a sample of firms

ecently na-

lyzed,formal rientation

ourses re quite

common,

at least in large firms see H. F. Clark and H. S.

Sloan,

Classrooms n the

Factories

New

York:

New

York

University ress,

19551,

hap. iv).


11/42

18 GARY S.

BECKER

search"), or the time employed n inter-

viewing, esting, hecking eferences,

nd

in bookkeepingdo not so obviously raise

the knowledge of new employees,

but

they oo are a form f specificnvestment

in human capital, althoughnot training.

They are an investment

ecause outlays

over a short period create distributed

effects n productivity;

hey are specific

because productivity s raised primarily

in the firmsmaking he

outlays; they are

in human capital because they ose their

value whenever mployees eave.

In the

restof this section usuallyrefer nly to

on-the-job pecific raining ven though

the analysis applies to

all on-the-job

specific nvestment.

Even after hiring costs are incurred,

firms suallyknowonly limited mount

about

the ability

and potential of

new

employees. They try to

increase their

knowledge in various

ways-testing,

rotation among departments, rial and

error, etc.-for greater

knowledge per-

mits a more efficient tilizationofman-

power.Expenditures

n

acquiring

knowl-

edge of employee talents

would be a

specific investment if the knowledge

could be keptfrom ther firms, or

then

productivitywould be

raised more

n

the

firms

makingtheexpenditures

han else-

where.

The

effect

f

nvestment

n

employees

on

theirproductivity

lsewhere

depends

on market conditions s well as on the

nature of the investment. Very strong

monopsonists

might

be completely

nsu-

lated from

competition

by

other

firms,

and

practically

all

investments

n

their

labor

force

would

be

specific.

On

the

other

hand,

firms

n

extremely ompeti-

tive

labor

marketswould face a

constant

threat

of

raiding

and would have

fewer

specific

nvestments

vailable.

These

examples convey

some of

the

surprisingly arge

variety

of situations

that come

under

the rubric

f specific

n-

vestment.

This

set is now

treated ab-

stractly

n order that

a

general formal

analysis can

be

developed.

Empirical

situations are brought in again after

severalmajor

implications

f the formal

analysis

have been

developed.

If all

training

were completely

pecific,

the wage

that

an employee

could get

elsewhere

would

be independent

of

the

amount

of

training

he

had

received. One

might plausibly

argue,

then, that

the

wage paid

by

firmswould also

be

inde-

pendent

of

training.

f so, firms

would

have to pay trainingcosts, forno ra-

tional

employee

would

pay

for training

that did

not benefit

him.

Firms

would

collect the

returnfrom

uch training

n

the form f

largerprofits

esulting

rom

higher

productivity,

nd

training

would

be

provided

whenever

the return-dis-

counted

at an

appropriate

rate-was

at

least as

large as

the cost. Long-run

competitive

quilibrium

equires

hat

the

present value of the return exactly

equals costs.

These propositions

an

be

stated more

formally

with

the equations

developed

earlier. According

to

equations

(5)

and

(7)

the

equilibrium

of a

firm

providing

training

n

competitive

markets can

be

written

s

0~

=

E

+0-t

( 11

=

lvo+C

where

C

is

the cost

of

training iven

only

in the initial

period,

MPo

is the

oppor-

tunity

marginal

product

of

trainees,

Wo

is

the

wage

paid

to trainees,

and

Wt

and

MPt

are

the

wage

and

marginal

product

in

period

t.

If

the

analysis

of

completely

pecific

raininggiven

in

the

preceding

paragraph was correct, W

would

always equal

the

wage

that could


12/42

INVESTMENT IN

HUMAN CAPITAL: A THEORETICAL

ANALYSIS

19

be

received

lsewhere,

MPt

-

Wt

would

be the fullreturn n t

from

raining iven

in 0, and G

would be the

present

value

of these returns.

ince

MPo

measuresthe

marginal product elsewhere and WO

would measure the

wage

elsewhere

of

trainees,MP'

=

Wo.

As a

consequence

G

=

C, or,

n

full

equilibrium,

he return

from

raining quals

costs.

Before

claimingthat

the

usual equal-

itybetween

marginal

product nd wages

holds

when

completely pecific

raining

is

considered, he reader

should bear in

mind

two points. The

first s

that

the

equality between wages and marginal

product n the

initial

period nvolves op-

portunity,

ot

actual

marginal product.

Wages

would

be

greater

than actual

marginal product if

some productivity

was

foregone

s

part

of the

training ro-

gram. The

second is that, even if

wages

equaled marginal

product

nitially, hey

would

be

less

in

the

future

because

the

differences between

future

marginal

products ndwages constitute hereturn

to

training

nd are

collected

by

the firm.

All of

thisfollows rom

heassumption

that firms

pay all costs

and collect all

returns.But could not one

equally

well

arguethat

workers ay all

specific rain-

ing

costs by receiving

appropriately

lower

wages initially

and

collect

all

re-

turns

by

receivingwages equal

to mar-

ginal

product ater?

n

terms f

equation

(11), Wtwouldequal MPt, Gwouldequal

zero, and

Wo=MP'-C, just as with

general training.

Is it

more

plausible

that firms

ather than workers

pay

for

and collect

and return rom

raining?

An

answercan be

foundby

reasoning

along

the

following

ines. If a firm

had

paid

for

he

specific

raining

f

a worker

who

quit

to take

another

ob,

its

capital

expenditurewould be

partly

wasted,

for

no furtherreturn could

be collected.

Likewise,

a worker

fired after he had

paid for specific

training would

be

un-

able

to collect any further eturn and

would also suffer

capital loss.

The

willingness

f

workers r firms o pay

for

specific raining hould,therefore,losely

depend on the likelihood of labor turn-

over.

To bring nturnover t this pointmay

seem ike

a deus exmachine ince t is al-

most always

ignored in traditional

theory.

n

the usual

analysis of competi-

tive firms,wages

equal marginal prod-

uct, and since wages and marginal

product are assumed

to

be the

same

in

many firms,no one suffers rom turn-

over.

It

would not matter whether a

firm's abor force

always contained the

same persons or a

rapidly changing

group.Any person eaving onefirm ould

do

equally well

in

otherfirms, nd his

employer ould replace

him

without ny

change

in

profits.

n

other

words,

turn-

over

is

ignored

n

traditional

theory

be-

cause

it

plays no

importantrole

within

theframework f the theory.

Turnover

becomes important

when

costs

are

imposed

on workers or

firms,

which

are

precisely

he

effects f

specific

training. Suppose a

firm

paid all the

specific training

costs of a worker who

quitafter ompletingt.

According

o

our

earlier analysis

he

would have been

re-

ceiving

the

market

wage

and a

new em-

ployee

could be

hired at the same

wage.

If the new employee were not given

training,

his

marginalproduct would be

less

than that

of

the one who

quit

since

presumably training raised the latter's

productivity.

Training

could raise

the

new

employee's

productivity

ut

would

require additional

expendituresby

the

firm.

n other

words,

firm

s

hurt

by

the

departure

of

a trained

employee

because

an

equally profitable

new

employee

could

not

be obtained.

In

the

same

way

an

employee

who

pays

for

pecific

rain-


13/42

20

GARY S. BECKER

ingwould

suffer

loss from eing aid

off

because

he

could

not

find an equally

good

job

elsewhere.

To bring turnover

into

the analysis

of specific

training

s

not, therefore, deus ex machinebut is

made necessary

by

the

important

ink

between

them.

Firms

paying

for specific

training

might take account

of

turnover

merely

by obtaining

a sufficiently

arge return

from those

remaining

to

counterbal-

ance the

oss

from

hose

eaving. The

re-

turn on "successes"-those

remaining-

would,

of

course,overestimate

he

aver-

age return n all training xpenditures.)

Firms could

do even better,however,

by

recognizing

hat

the likelihood

of a quit

is not fixed

but depends

on wages.

In-

stead of merely

recouping

on

successes

what is lost

on failures, hey might

re-

duce the

likelihood of

failure itself

by

offering

igher

wages

after raining

han

could be received

elsewhere.

n

effect,

they would

offer

mployees

ome

of

the

returnfromtraining.Matters would be

improved

n

some respects

but worsened

in others,

for

the higher

wage would

make thesupply

of trainees

greater

han

the demand,and

rationing

would

be re-

quired.

The final

step

would be to shift

some training

osts

as well as returns

o

employees,

hereby

ringingupply

more

in

line with

demand.

Whenthe

final tep

is completed

firms

no

longer pay

all

training ostsnor do theycollect all the

return

but

they

share both with em-

ployees."4

he shares

of each

depend

on

the

relation

between

quit

rates and

wages,

layoff

rates

and

profits,

nd

on

other

factors

not discussed

here,

such as

the

cost

of

funds,

ttitudes

toward

risk,

and desires

for

iquidity.'5

If training

were

not completely

spe-

cific, roductivity

ould ncrease

n

other

firms s well,

and

the

wage

that

could

be

received

elsewhere

would

also

in-

crease. Such

training

an be looked

upon

as

thesum of two components,

ne

com-

pletely

general,

he

other ompletely

pe-

cific, with

the former

being

relatively

larger the greater the effecton wages

in other

firms elative

to the

firms

ro-

viding

the

training.

Since

firms

do

not

pay

any

of

completely eneral

costs and

onlypart

of

completely

pecific osts,

the

fraction

f costs paid

by

firmswould

be

negatively

related

to the importance

of

the general

component,

r positively

re-

lated

to

the

specificity

f the

training.

Our

conclusions

an

be stated formal-

ly in terms of the equations developed

earlier.

f

G

is the present

value of

the re-

turnfrom raining

ollectedby

firms,

he

fundamental

quation

is

MP'

+

G

=

W

+

C.

(12)

If G'

measures

the

return collected by

employees,

the total return,

G",

would

be

the sum of G

and G'.

In

full

equi-

librium

he

total

returnwould

equal

total

costs, or G" = C. Let a representthe

fraction

f the total

return ollected by

firms. ince

G

=

aG"

and

G"

=

C,

equa-

tion (12)

can

be written

s

14

Marshall

was

clearly

aware of

specific

alents

and their

ffect n

wages

and

productivity:

Thus

the

head

clerkin

a business

has an

acquaintance

withmen

and things,

he use

of which

he could

in

somecases

sell at a

highprice

to rivalfirms.

ut

in

other

ases

it

sof

kind

to

be

ofnovalue

save to

the

business nwhichhe already s; and thenhisdepar-

turewould

perhaps

njure

t by

everal

imes

hevalue

of his

salary,

whileprobably

he

could

not

get

half

thatsalary

elsewhere"

op. cit.,

p. 626). (My

italics.)

However,

he overstressed

he element

of indeter-

minacy n

these

wages ("their

earnings

re deter-

mined ..

bya bargain

between

hem nd

their m-

ployers,

the terms

of which are theoretically

r-

bitrary" ibid.,

fn.])

because

he

ignored

he effect

f

wages

on turnover.

15

The

rate used

to discount

osts

and

returns s

the

sum

of a (positive)

rate measuring

he cost of

funds,

(positive

or

negative)

risk

premium,

nd a

liquiditypremium hat s presumably ositive ince

capital

invested

n

specific

raining

s

very

lliquid

(see

the discussion

n

Sec.

IV,

C).


14/42

INVESTMENT

IN HUMAN

CAPITAL:

A

THEORETICAL

ANALYSIS

21

MP'+ aC

=

W

+

C, (13)

or

I == P'- (1 a)C.16 (14)

Employees pay the same

fraction of

costs, 1

-

a, as they collect in returns,

which generalizes

the results obtained

earlier.

For

if

training

were completely

general, a

=

o, and equation

(14) re-

duces to equation (10); iffirms ollected

all the return

from

raining,

=

1,

and

(14) reduces to MP'

=

Wo;

if

0

< a <

1, none of

the

earlier quations

are satis-

factory.

A few

major implications

of this

analysis of specific training are now

developed.

Rational

firms

pay generally

trained

employees

he

same wage

and specifically

trained

employees

a

higher

wage

than

they could get

elsewhere.A

readermight

easily

believe the

contrary,

amely,that

general rainingwould

command higher

wage

relative o alternatives han

specific

training oes, since, fter ll, competition

for

persons

with the

latter

is

apt

to be

weaker than for those

with

the former.

This view, however, overlooks

the

fact

that

general training

raises the

wages

that

could

be received elsewhere while

(completely) specifictraining

does

not,

so

a

comparison

with alternative

wages

gives a misleading impression

of the

absolute ffect

n

wages

of

different

ypes

of training.Moreover,firms re not too

concerned about

the

turnover of

em-

ployeeswith general training nd have

no incentive to

offer hem a premium

above

wages

elsewhere

because

the cost

16

IfG" didnot equal C, these

quationswould

be

slightlymore complicated.

Suppose, for example,

G"

=

G

+

G'

=

C

+

-n

n

>

0 so that the

present

value

of thetotal returnwouldbe greater han

total

costs. Then

G

=

aG"

=

aC

+

an, and

MIP'+ aC+ an = W+C,

or

W

=

AP'- [ 1-a

)C-anl].

of such

training

s borne

entirely y

em-

ployees. Firms are concerned

about the

turnover

of

employees

with

specific

training,

nd a

premium

s offered

o re-

duce their turnover because firmspay

part oftheir

training

osts.

The

part

of

specific

rainingpaid by

employees

has effects imilar

to those

discussed

earlier for

generaltraining:

t

is also paid by a reduction

n

wages

dur-

ing the training

period,

tends

to make

age-earnings profiles

steeper

and more

concave,

etc.

The

part

paid by

firms

as

none

of

these

implications,

ince

current

or futurewageswould not be affected.

Specific,

nlike

general, raining

would

produce certain

"external"

effects,

or

quits

would

prevent irms

rom

apturing

the

fullreturn

n

costs

paid by

them, nd

layoffs

would do the same to

employees.

Note,

however,

that

these are

external

diseconomies

mposed

on

the

employees

or

employers

f

firms roviding

he train-

ing,

not

external

economiesaccruing to

other firms.

Employees

with

specific

raininghave

less

incentive o quit,

and firms ave less

incentive to

fire

them, than employees

with no

or

general training,

which

im-

plies that

quit

and

layoff ateswould be

inversely related

to the

amount of

specific raining. urnover

would be least

for

employees

with

extremely specific

training

and most

for those

receiving

such general trainingthat productivity

was raised

less

in

firms

providing the

training

than elsewhere.These

proposi-

tions are as

applicable

to

the

large

amount

of

irregular

quits

and

layoffs

that

continually

occur

as to

the more

regular cyclical and secular

movements

in

turnover;

in

this

section, however,

only

the

more

regular

movements

are

discussed.

Consider a

firm

that experiences an

unexpected

decline

in

demand for

its


15/42

22

GARY S. BECKER

output,

the rest

of the

economy

being

unaffected.

The marginal

product

of

employees

without

specific

training-

such

as untrained

or generally

trained

employees presumablynitially

qualed

wages,

and

their employment

would

be

reduced

to prevent

theirmarginal

pro-

ductivity

from

falling

below wages.

The

marginalproduct

of

specifically

rained

employees

initially

would

have been

greater

han

wages.

A decline

n demand

would

reduce these marginal

products

too,

but

as

long

as they

were reduced

by

less than

the

nitial

difference

ithwages,

firmshave no incentiveto lay off uch

employees.

For sunk

costs are sunk,

and

there

s no

incentive

o lay

off

mployees

whose

marginalproduct

s

greater

than

wages,

no

matter

how

unwise

t

was,

in

retrospect,

o invest

in

their training.

Thus

workerswith specific

raining

eem

less likely

to

be

laid

off

s a consequence

of a

decline

n

demand

than

are

untrained

or even

generally

rained

workers.'7

If the decline in demand were suf-

ficiently reat

so

that

even

themarginal

product

of specifically

rained workers

was pushed

below

wages,

would the

firm

just

proceed

to

lay

them off until

the

marginal

product

was brought

into

equality

withwages?

To

show the

danger

here, ssume

thatall

the

cost and

return

from pecific

raining

was

paid and

col-

lected by

the

firm.Any worker

aid off

wouldtry ofind new ob, sincenothing

would

bind

him

to

the old

one.'8

The

firmmight

be

hurt

if

a

new

job

was

found,

for the firm's nvestment

n his

17

A very

imilar rgument

s developedby

Wal-

ter Oi

in "Labor as a Quasi-fixed

actorof

Produc-

tion" unpublished

h.D.

dissertation, niversity

f

Chicago).

18

Actually

one need only

assume

that the quit

rate of laid-off

workerstends

to

be significantly

greater han that ofemployedworkers,f onlybe-

cause

the

cost of

searching

or

nother ob

is less

for

laid-off

orkers.

training

might

be lost

forever.

f

spe-

cifically

trainedworkers

were

not

laid

off, the

firm

would

lose

now because

marginal product

would

be less

than

wagesbutwouldgain

in

the

futuref the

decline

in demand proved

temporary.

There is an

incentive,

herefore,

ot

to

lay

offworkers

with

specific

training

when

their marginal

product

is only

temporarily

elow

wages,

and

the larger

a firm's

nvestment

he

greater

the

in-

centive

not to

lay

off uch

workers.

A worker

ollecting

ome of thereturn

from pecific

raining

wouldhave

less

in-

centiveto finda new job when tempo-

rarily

aid off han

others

would:

he does

not want

to

lose

his investment.

His

be-

havior

while laid off

n turn

affects

his

chances

of

being

laid off,

for

if

it

were

known

that

he would not

readily take

another

ob,

the firm

ould

lay

him

off

without

much

fear of losing

its

invest-

ment.

The

conclusion

here can

be

briefly

summarized.When one firmalone ex-

periences

an unexpected

decline in de-

mand,

relatively

few

workerswith

spe-

cific

training

would

be

laid

off,

f

only

because

their

marginal

product

were

initially reater

hantheir

wage. f the

de-

cline

were

permanent,

ll workerswould

be

laid

off

when

their

marginal

product

became

less than

their

wage and

all those

laid off

would

have

to find

jobs

else-

where. If the decline were temporary,

specifically

rained

workers

might

not

be

laid off

even

though

their

marginal

product

were less than

their

wage

be-

cause

the

firm

would

suffer

f

they

took

other

obs.

The

likelihood

f their

aking

other

jobs

would

be

inversely

related,

and

therefore

the likelihood of

their

being

aid

off

would

be

positively

elated,

to

the

extent

of

theirown investment

n

training.

The analysiscan easily

be

extended

to


16/42

INVESTMENT

IN HUMAN

CAPITAL:

A THEORETICAL

ANALYSIS

23

cover general

declines in demand;

sup-

pose,

for

example, a

general

cyclicalde-

cline

occurred. et me assume

that wages

are sticky nd remain

t theinitial evel.

If the decline in business activity

were

not

sufficient o reduce

the

marginal

product below

the

wage, workerswith

specific

training would not

be laid off

even

thoughothers

would be, just as

be-

fore.

If

the

decline

reduced marginal

product

below wages,

only one modifica-

tion

in

the previous

analysis

is required.

A

firm

would

have a greater

ncentive

o

lay

off pecifically rained

workers

han

when it alone experiences decline be-

cause

laid-off orkerswould

be

less

ikely

to

find other obs

when

unemployment

was widespread.

In other respects

the

implications

of a general

decline with

wage

rigidity

re the same as those

of a

decline

n

one

firm

lone.

The

discussion has concentrated

on

layoff

ates,but the same

kind of reason-

ing

shows that a rise

n wages elsewhere

wouldcause fewer uitsamongspecifical-

ly

trained

workers

than among

others.

For

specifically

rainedworkers

nitially

receivehigher

wages than are

available

elsewhere and

the

wage

rise

elsewhere

would

have to be

greater

han

the

initial

difference efore they would

consider

quitting.

Thus both the

quit

and

layoff

rateof specifically

rained

workers

would

be

relatively

ow and

fluctuate

elatively

lessduring usinesscycles.These are im-

portant

mplications

han can

be tested

with the data available.

Although

quits

and

layoffs

re

influ-

enced

by

considerations ther

than

in-

vestment

osts,

ome

of

these,

uch

as

the

presence

of pension plans,

are

more

strongly

elated

o

investments

han

may

appear

at

first

blush.

A

pension

plan

with

incomplete

vesting privileges'9

penalizes employeesquittingbeforere-

tirement

nd thus

provides

an

incentive

-often an extremely

owerful ne not

to quit.

At the same timepension plans

"insure" firms gainst

quits for hey are

given a lump sum-the

non-vestedpor-

tion of payments-whenever a worker

quits.

Insurance s neededfor pecifically

trained mployees ecause

their urnover

would impose capital

losses on firms.

Firmscan discourage uch

quits by shar-

ing training costs and

the return with

employees,

but

they have less need to

discourage

them

and

would be more

willing

o pay

for

training osts if nsur-

ance

was provided.

The

effects

n the

n-

centive o invest n one's employeesmay

have been

a

major

stimulus to the de-

velopment

of

pension plans.20

An effectiveong-term

ontractwould

insure firms

gainst

quits, just as pen-

sions

do,

and also insure

employees

against layoffs.

Firms

would

be more

willing o pay

for ll kinds

of

training-

assumingfuturewageswere set

at an ap-

propriate level-since a

contract,

in

effect, onverts all training into com-

pletely pecific raining.

A

casual reading

of

history uggests

that

long-term

on-

tracts

have, indeed, primarily

been

a

means of

inducing

firms

to

undertake

large

investments

n

employees.

These

contractsare

seldom

used

today

in

the

United

States,2'

nd while

they

have

de-

clined in

importance

over

time, they

were

probably always

the

exception

here

largely because courts have considered

them

a form of

involuntary

servitude.

19

According

o the National Bureau

ofEconomic

Research tudy

ofpensions,mostplansstillhave in-

completevesting

see

D.

Holland's

report n A Re-

spectfor Facts:

National

Bureau

of Economic

Re-

searchAnnual

Report New York: National Bureau

of Economic Research,

1960],pp. 44-46).

20

In

recentyears

pensionshave also been an

im-

portant ax-saving evice, which ertainly

as been

a crucialfactorn theirmushrooming rowth.

21

The military nd entertainment

ndustry re

the major exceptions.


17/42

24

GARY S.

BECKER

Moreover,

ny enforcible

ontractcould

at

best specify he

hours requiredon a

job,

not the

quality

of performance.

Since performance

an

varywidely, un-

happyworkers ould usually "sabotage"

operations o

induce

employers o release

them

from ontracts.

Some trainingmay

be useful

neither

in most

nor only

n a singlefirm

ut in a

set of

firms efinedby

product,

type of

work,

or geographical

ocation.

For

ex-

ample, carpentry

training

would raise

productivity

primarily

n

the construc-

tion industry,

nd

French

egal training

wouldbe ineffectiventhe UnitedStates,

with

its differentanguage

and

legal

institutions.

Such training

would tend

to be paid by trainees,

ince

a single

firm

couldnot readily

ollect

he

return,22

nd

in this

respectwould be

the same

as gen-

eral training.

n one respect,however,

t

is similar

to specific training.

Workers

with

training"specific"

to

an

industry,

occupation,

or country

re less likely to

leave thatindustry, ccupation,or coun-

try (via migration)

than other workers,

so their industrial,

occupational,

or

country

"turnover"

would

be less than

average.

The same

result s obtained

for

specific

training, except

that a

firm

rather

than an industry,

ccupation,or

country

s

used as

the

unit

of

observa-

tion

in

measuring

urnover.

An

analysis

of

specific

raining, herefore,

s

helpful

also in understanding he effects f cer-

tain

types

of

"general"

training.

Although discrepancy

etween

mar-

ginal product

and wages

is

frequently

takenas evidence

of mperfections

n

the

competitive

ystem,

t

would occur

even

in a perfectly

ompetitive nvironment

where

there

is investment

in

specific

22

Sometimes irms o-operate

n

payingtraining

costs, especiallywhen training pprentices see A

Look at Industrial

Training n MercerCounty,

N.J.

[Washington

ureau

of

Apprenticeship

nd

Train-

ing,

19591,

. 3).

training.

The investment

pproach

pro-

vides

a very

different

nterpretation

f

some

commonphenomena,

s canbe seen

from

he following

xamples.

A positive difference etween

mar-

ginal product

and

wages

is

usually said

to

be

evidence

ofmonopsony ower,

nd

just

as the ratio

of

product

price to

marginal

cost has been

suggested

as a

measure

ofmonopolypower,

so has the

ratio

of marginalproduct

to wages been

suggested

as a

measure

of

monopsony

power.

But

specific

rainingwould

also

make

this ratio greater

than

one. Does

the differencebetween the marginal

product and

the earnings

of major-

league

baseball players,

for example,

measure

monopsonypower

or

the return

on a team's investment? ince

teams do

spend

a great

deal on developingplayers,

some

and

perhaps

most of

the

difference

must

be considereda

returnon invest-

ment even

were there

no

uncertainty

about

the

abilities

of

different

layers.23

Earningsmightdiffer reatlyamong

firms,

Investigación en Capital Humano Becker

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