Last Updated Aug 14, 2009 12:04 PM EDT
Nobel Prize-winning economist Gary Becker
You probably don't know who Gary Becker is, but if you're
serious about advancing in the workplace, you should. A longtime professor at
the University of Chicago and one-time acolyte of Milton Friedman, Becker received
the Nobel Prize in 1992 for, among other things, his original work on human
capital, the idea that investing in an employee's education and
training is similar to a business investing in equipment — from which
this section of MoneyWatch takes its title.
Becker’s initial ideas about human capital were
controversial at the time he introduced them in the 1960s, but have now become
widely accepted. Becker was also one of first to apply econometric principles
to social issues, looking at why parents act altruistically towards rotten kids
(according to Becker, it’s a form of investment in retirement), or
how criminals plan their illicit activities by applying their own cost-benefit
analysis to the situation. While this so-called “social math”
has been popularized recently by writers such as Malcolm Gladwell and Freakonomics
author and economist Steven Levitt (with whom Becker works at the
University of Chicago), Becker put social problems under the economic lens as
early as the late ’50s.
Becker recently took some time with MoneyWatch.com
contributor Edmund Lee to discuss his current views of human capital and how
best to increase it, why a liberal arts education is the best asset to have in
a volatile economy, and how he’s managed, even at the age of 78, to
increase his own human capital.
How have your ideas about human capital changed since your original
research in the 1960s?
Well, it’s become much more pervasive than I
would have anticipated. People apply the concept now not only to labor markets
but also to a lot of other types of activities — like health care. I
think the concept overall has a much broader applicability today.
Can you still increase your human capital by investing in education as much
as you could in the past?
The benefits of education in terms of earnings have
exploded during the last 30 years and are much higher than when I was first
writing about this — and that’s been one of the surprises.
The people who drop out of high school, and even many high-school graduates who
have no college education, are really at a tremendous disadvantage in the
economy. They have much lower earnings and greater unemployment.
Over your employment lifespan, you may have to change jobs
across companies more frequently than in the past. What people should look for
then as they invest in their human capital is more flexibility. Instead of
having human capital that would be particularly useful for one company or even
one occupation narrowly defined, you should try to recognize that the future
may involve working at another company or in a somewhat different occupation.
So look for flexibility.
What kind of education affords such flexibility?
A liberal arts education. I wrote about this 40 years ago,
but I think it’s become even more important today. In an uncertain
world, where you don’t know what the economic situation will be like
20 years from now, you want an education based on general principles rather
than on specific skills.
So what about someone who may be mid-career? Can this person go back to school,
or take on almost any amount of educational debt, and still get a return on
I know we’ve seen a strong trend toward greater
adult education of various forms — more people mid-career are taking
courses. This is connected to the greater uncertainty in the economy. So, yes,
this means that your investment in education cannot stop when you finish
college. You have to continue to invest because new things come along, like the
When I was at school, the computer was just beginning to
get started. They were these giant things. With the development of the personal
computer and the Internet, one had to retrain oneself, which I had to do. There’ll
be other things coming along in the future — who knows what they’ll
be, but there’ll be various things. But there again, a foundation
when you were first in school that gave you greater command of basic principles
will allow you to relearn more easily mid-career.
So now you’ve retrained yourself in the computer arts, and you
even have a blog. Does the advent of personality-driven blogs and the
value attached to celebrity suggest that human capital is becoming more
dependent upon creativity and personality?
I’m not sure about that. I haven’t seen
any data to support that idea. But there’s one aspect of this that
may have become more important. A number of activities, including blogs, have a
very skewed distribution of rewards. That’s sometimes called a
superstar phenomenon, where somebody who’s only a little bit better
than somebody else can command a great deal of the rewards, either in income or
in other measures of prestige. That has definitely increased. And, yes, in
order to achieve that position, one has to be more creative.
But a general education is still the more important
factor. Just look at earnings. In the 1970s, the average college graduate
earned about 40 percent more per hour than the average high-school graduate.
Now it’s about 80 percent. And it’s an even bigger
difference for postgraduates. The advantages of a typical college education
have really grown enormously. Not only in the United States. I’ve
been able to document that for many parts of Latin America, Asia, and Europe as
Has international competition reduced the value of the U.S.’s
No, but what I think it has done has made human capital
even more important. Other countries have caught up with the U.S., to some
extent, in the propensity of their students to go on to higher education. In
some instances, they have surpassed us. For instance, we have shockingly high
rates of teenagers who drop out of high school. And it’s hardly
improved at all in the last 30 years. Countries like South Korea, some of the
European countries, and Japan — almost all their students graduate
high school. South Korea, a much poorer country, has a larger fraction of
high-school graduates who finish college than we do. So I think we have to make
a renewed effort in the educational area. We’re doing well, but we
can do even better.
More baby boomers have been forced to postpone their retirement because of
the economic crisis. What does this trend mean for the value of their human
I think it’s a very good trend —
despite the weak economic environment and the fact that people have lost the
value of their savings. As we’ve become healthier, mentally and
physically, it made little sense for retirements to start in one’s
early 60s. By age 65, most people have retired, and that was an incentive
created by the Social Security system.
Many people are healthy enough and like their work enough
that they would prefer to continue to work if they didn’t have
incentives not to do so. It does mean that when you invest in your human
capital, you have to think of it not as a very short-term or a medium-term
investment, but as a long-term one, extending not only into the early 60s but
into the 70s and maybe even beyond for some people.
Do you really think most people would want to work past 65?
I think people would want to do that if they had neutral
incentives. Some people hate their work and they can’t wait to retire
— that’s fine. But a lot of people not only like the income
but even like their work, and they would prefer to continue to work and maybe
Sounds like that’s the category you’d put yourself in.
[Laughs] Yes, it is. We always said human capital
is an investment with a long life, but it’s even longer as people
extend their working time in their later age. Also, given the difficulties
faced by the Social Security system and the Medicare system, later working time
is almost a necessity if we’re to meet those future obligations.
So how would you create these “neutral incentives” to
work? Sounds like you’d favor an overhaul of Social Security.
I’ve been a strong supporter of individual
accounts, which people can save into tax-free. And whenever they do retire —
and that would be their choice — they would get access to that
account. I think we should convert pay-as-you-go Social Security into something
similar to IRAs but much more extensive, covering the bulk of the population
rather than just a really small fraction of higher-income people.
Unemployment is currently at 9.4 percent. How can the U.S. restore the
value of its human capital?
Recessions lead to higher unemployment. And this is a
tough recession. But so far we have a lower unemployment level than we had in
1981 to 1982, when we reached almost 11 percent. The main thing one wants to
maintain is a very flexible labor market, but combine that with a fairly robust
system of unemployment compensation. But we have to have flexibility that
enables people and companies to either change employees or change jobs, and
that makes it much easier to adapt to international shocks. We don’t
want to lose the great flexibility of the labor market.
More on MoneyWatch:
Milevsky: Your Real Net Worth
de Botton: Make Your Job More Satisfying
Pink: Why Your Human Capital May Be in Jeopardy
Loehr: Train for Success Like a Pro Athlete