Questions: Human Capital Theory

Question 1

According to Becker's theory, who bears the cost of general training (skills usable across firms) and why?

• A. The firm bears the cost because it benefits from more productive workers
• B. The worker bears the cost (through lower training-period wages) because the skills are portable — the firm cannot recoup its investment if the worker leaves
• C. The government bears the cost through education subsidies
• D. No one bears the cost because general training is free

Answer: (B)

General training increases the worker's productivity at all firms, so a trained worker's market wage rises. If the current firm paid for the training, it would have to match the now-higher market wage to retain the worker, getting no return on its investment. Becker's prediction is that the worker effectively pays for general training by accepting wages below their marginal product during the training period — the wage reduction represents the worker's investment. Firm-specific training, by contrast, increases productivity only at the current firm, so the firm and worker can share the costs and returns.

Question 2

Age-earnings profiles that rise steeply early in a career and flatten later are consistent with human capital theory.

• T. True
• F. False

Answer: True

Human capital theory predicts exactly this pattern. Early in a career, workers invest heavily in on-the-job training and skill development — their productivity rises rapidly as skills accumulate. As the career progresses, the investment rate declines (the payback period is shorter, so the return on investment falls) and skills may depreciate. The earnings profile is steepest when human capital investment is most intensive (early career) and flattens as investment diminishes and the remaining work horizon shortens.

Question 3

What is the key difference between the human capital explanation and the signaling explanation for why college graduates earn more than non-graduates?

Model answer: Human capital theory says college makes workers more productive (by teaching skills and knowledge), so employers pay more for genuine increases in capability. Signaling theory (Spence) says college may not increase productivity at all — instead, completing college credibly signals pre-existing traits (ability, persistence, conformity) that employers value. Under signaling, the education premium reflects selection, not causation: able people go to college and would have been productive anyway.

The distinction has major policy implications. If the human capital view is correct, subsidizing education increases aggregate productivity and is socially efficient. If the signaling view is correct, expanding access to college mainly reshuffles the signaling hierarchy without increasing total output — it is a socially wasteful arms race. The truth is likely a mixture: education both builds skills (human capital) and signals ability (signaling), with the relative importance varying by field and level.