I. The Theory of Human Capital
(i) Background of the theory of human capital
The background of the creation of human capital theory is to question the traditional economic theory.Traditional economic theory proposes three elements that drive economic growth: land, labor, and capital.Although there are labour factors in these three elements, only the quantity of labour is involved, and the quality of labour is not included.Thus, since the beginning of the 20th century, traditional economic theory has been seriously challenged in explaining the phenomenon of economic growth.Economic growth in many Western industrialized countries shows that total output growth is greater than the sum of capital accumulation and labor growth, that is, total output growth is greater than total factor input growth.Especially at the end of the Second World War, the entire domestic economy of the defeated countries of West Germany and Japan collapsed.Most economists estimate it will take 30 years to clear the rubble alone.In less than a decade, however, their national economies have largely returned to pre-war levels.On the other hand, some independent countries after the war, despite the "economic aid" provided by developed countries, have been relatively slow in national economic growth, which cannot be explained by traditional economic theory.This led to a renewed exploration of the role of human capital in economic growth, leading to what has been called the "human investment revolution in economic thinking."
In 1959, the famous American economist T. Schultz.Dr. W. Schultz, author of Investing in Manpower: An Economist's Perspective, elaborates on the main ideas of the School of Human Capital Theory.Schultz first proposed that human capital is the core concept of human capital theory.According to Schultz, traditional economic theory overemphasizes the role of non-human capital in economic growth and fails to take into account the important role of human capital and its role in modern economic production.According to Schultz, capital has two forms: physical capital and human capital.Human capital is the quality of workers or their knowledge, skills, and ability to work.Human capital includes both qualitative and qualitative aspects.The quantitative aspect refers to the number and percentage of useful work in a society, and the labor time, to some extent, represents the amount of human capital in that society; the qualitative aspect refers to people's skills, knowledge, proficiency and other similar things.Schultz believes that the quality of human capital is its fundamental connotation, the so-called human capital, is "the productive capacity of people as income creators in the economy", is "the stock of skills and productive knowledge embodied in the person".Human capital is a major factor in productive growth.
The Measurement of Educational Return by Human Capital Theory
The return on investment in education is a measure of a person's or society's future net economic reward for increasing the amount of education they receive.There are two main methods for estimating educational returns, the "traditional method" (estimation of internal returns) and the "Mindsor method".
The costs and benefits are calculated at different levels of education, as shown in Figure 1.Abandoned income is calculated on the basis of the income that an individual may earn from working without going to school (C1 in Figure 1), and the direct cost to the family (C2) plus C1 is the private rate of return for personal costs.The public cost C3 plus C1 and C2 estimates the annual social cost (C1+C2+C3) to calculate the social rate of return.Annual personal and social gains are calculated on the basis of the difference in the average income of people with different levels of education (E2-E1 in Figure 1).Year-over-year costs and benefits are substituted for the above formula to calculate the discount rate at which costs and benefits are equal, that is, the rate of return on education.
Mincer's method is to use regression analysis to calculate personal income data (Y), school years (S) labor market experience (E) into the following formula.
The rate of return in the above formula is Mintel.As can be seen from the above formula:
The main points of human capital theory
Human capital theory focuses on labor market research on educational returns, including private and social returns.The theory holds that education can improve people's cognitive skills, improve labor productivity, and enable people to deal with imbalances (the so-called ability to deal with imbalances refers to people's response to changes and updates in economic conditions).Education can bring higher income to individuals, stronger employment conversion and migration capacity; for the state, the organic combination of individuals constitutes a society, and the level of national education increases individual income and labor productivity.
II. Screening theory
(i) Background of Screening Theory
The basic argument of human capital theory is that education can improve people's cognitive skills, thereby increasing labor productivity and driving economic growth.But practice in many countries in the 1960s proved that many of the ideas of human capital theory were inconsistent with reality, and the rapid expansion of education in the 1960s did not lead to faster growth in labor productivity and economies.Therefore, the once-popular theory of human capital has been severely criticized and challenged.These criticisms focus on whether education really improves labor productivity.The main criticisms of human capital theory include screening theory, labor market segmentation theory and socialization theory.
After the 1970s, the first criticism and revision of human capital theory was the screening theory, represented by Michael in 1973.Spence's "Selection Hypothesis - Job Market Signals" paper, an important marker for the formation of screening theories.
(b) Analytical Methods of Screening Theory
The analysis method of screening theory divides workers into two types: high and low ability, and their marginal products are MPH and MPL respectively, and the company pays them WH and WL respectively, where WH=MPH, WL=MPL, and WH>WL.
Assuming that the company does not know what the workers are capable of, the company will pay the average wage equal to the expected productivity of the existing workers.Salary is:
WA=P*MPH+（1-P）*MPL
Here P is the proportion of highly capable employees, with WA less than WH.This means that high- and low-skilled workers receive the same wages, resulting in the loss of market value and the continuous reduction of high-quality labor.But it's more likely that a highly capable worker will use a signal to his employer that his value is WH, such as in the form of an education certificate.Suppose that the educational costs of high-skilled workers and low-skilled workers' certificates are CH and CL, respectively.If CH = CL, then the company will still set the wage level at WA, because the low-skilled can prove themselves as easily as the high-skilled.Therefore, if a person with high ability wants to signal to the company that he or she is worth WH, then the education of the person with high ability must meet the following two situations:
(1) (1) WH-WL>CH
(2) (2) CL>WH-WL
The first scenario states that individuals invest in education only if the benefits of it outweigh its costs.The second is to show that the cost of education for people with low abilities is greater than the wage difference.These two situations demonstrate that education is profitable for high labour productivity groups under a reasonable wage structure.This is not the case for low-productivity groups.Education costs are higher for groups with low labour rates when the wages are the same.The wage gains from education are sufficient for high-productivity/low-cost people, and insufficient for low-productivity/high-cost people.This simple model demonstrates that education has no effect on labor productivity, only serves as a signal to dismiss people who are less capable.Although workers conceal as much information as possible against individuals, companies take steps to provide wages below their marginal cost during the probationary period.Screening models can also be subdivided into two types: weak and strong.A weak screening model is one in which employers begin by paying high salaries to highly educated people and then gradually adjust their salaries according to their actual abilities.A strong screening model is one in which employers gradually increase the wages of highly educated people by observing the actual work.
(iii) The main points of the screening theory
The screening hypothesis refers to the theory of education as a device that helps employers identify job seekers with different abilities in order to place them in different jobs.Screening hypothesis theory holds that an individual's education does not mean that it works for economic growth, and that education is merely a means and method of screening.If education contributes to economic growth, it effectively allocates people with different abilities to different jobs, explaining that education and income are positively correlated.
The Theory of Labour Market Segmentation
(i) Background to the theory of labour market segmentation
In the early 1970s, another theory that criticized and challenged the theory of human capital was the theory of labor market division.