Group 12 Human Capital: Difference between revisions

Latest revision as of 16:54, 4 May 2006

The purpose of our study is to identify the importance of human capital in today's economy.

How does the education and development of workers effect a certain country's economic success?

How does the structure of a workforce lead to production problems and successes.
How and why do governments effect human capital?

By looking at these questions in great detail, we hope to see how human capital effects the economy.

What is human capital?

In a basic idea, human capital is all of us..... you could say it is a term which expresses the conception of a human being as an economic category, a way of defining and categorizing peoples' skills and abilities as used in employment and otherwise contribute to the economy. In simpler terms, human capital is the specific abilities workers sell for wage...

For example, when a capitalist has a number of talented people on his pay-roll, he is said to have “human capital”. Human capital is here distinguished from the labour power which is purchased week-by-week at its value, because the assemblage of “good people” requires more than just paying the market price: a good working environment, good management and the build-up of a company ethos. These qualities of a capitalist firm add value to the capital over and above the value of material resources and intellectual property.

Source Source

Importance

It is important to understand how human capital works in an economy because:

it effects our worth in the labor force
it effects the economy and nation's wellbeing
it effects the diversity and qualifications of a workforce
it effects everyone's personal lifestyle

Human Capital Development

The exsistence of human capital greatly impacts the welfare of a nation's economy. The better trained a person is, the more that person will be able to produce. Hence, it is advantageous for countries and businesses to promote both the intellectual and trade development of its population. Nations are able to develop human capital in two ways: education and experience. Experience involves on-the-job training and learning through the process of trial and error. Education is the way in which workers are able to gain skills and values needed for a job before they actually enter into the labor force. The primary objective of each method is to improve the productivity of the worker.

Experience

Experience is the the amount of time a person has spent fulfilling a certain role in the economy. Experience is gained through trial and error, and through on the job training. Expericence improves human capital because the longer a person works at a single task, the more proficient that person will become at that given task. The proficiency earned by working at a task is beneficial to a company because it improves that companies productivity. The value of experience is seen by the fact that companies often reward experience.Often, the workers with the most seniority are given more responsibilty than newer workers and are paid on a higher pay scale. This shows that the increased productivity experience promotes is valued in an economy.

On-the-job Training(1)

On-the-Job Training is one major way that an economy is able to improve their human capital. With on-the-job training, a worker's productivity is increased by learning necessary skills on the job. This type of training is broken down into two categories: General and Specific Training.
- General Training (2)
  - General Training consists of training someone is manner consistent to the practices of the rest of the labor market. When somone is trained to work in position not specific to a single company, the cost of that training usually is paid by the worker receiving the training. This is to prevent the worker from receiving training and then leaving to use those skills for a competitor.
- Specific Training(3)
  - Specific Training is when a firm trains a person to do a task that is specific to the services and products it offers alone. The firm usually covers the expenses of this training because the skills learned are not utilized outside the firm.

On-the-Job Training (whether specific or general) and Experience both increase the productivity of the workers and the human capital of the overall economy. WIth this increased productivity, workers can expect higher wages and firms can expect higher output.

(4)

Education

Education is the second way in which a country is able to improve the quality of their human capital. Education teaches the skills and values that are necessary for a person to be competitive in the job market and maintain employment(5). Education teaches discipline, honesty, work ethic and many other attributes desirable to future employment. Education also serves as a screening device for prospective employers. When a person is better educated, that person is more likely to exhibit the desirable attributes a company desires and be more productive. Hence, college graudates often have higher earning potentials than that of non-college educated people (as seen in the graph below).

(6)

The Impact of Better Human Capital

Human capital is taken into account in the economic model in the production function. The production function graphs output against labor. The marginal productivity of labor (MPN) is the tangent of the production function on that graph and increases at a decreasing rate. When better training or education is received, the production function shifts upward because with improved skills and efficiency, workers will be able to produce more with a given capital then they would have been able to previously. The increase in productivity means a country's output or Gross Domestic Product will rise which has a beneficial impact on various parts of the economy (investment as an example).

Since education and training make a firm more productive, the firm will higher more labor at any given real wage (see image below). The increase in the number of people firms wish to higher means that there more people employed.

Importance of Human Capital Development

The importance of human capital development is crucial to a countries seeking economic development. Human capital development gives the economy a chance to become more productive and efficient. Efficiency and production lead to a strong and growing economy,which is desired by nearly every country. South Korea and the United States of America are clear examples of how human capital can lead to a robust economy and shortages of human capital can lead to economic apprehension.

South Korea

The South Korean economy has grown by nearly 8% each year since 1960 and has been one of the fastest growing economies since then (7). It now ranks among the world's largest economies. What has made South Korea successful, among other things, is its improved education system and the its worker development.Between 1945-1961, enrollment in schools increased on every level. Adults with formal education increased from 64% to 92%(8). As a result, Korea has has achieved the largest increase in human capital development. In 1991, in the Evaluation of Educational Attainment, which has showed correlation to future earnings, Korea finished second (9). It is not surprising then that the South Korean economy now flourishes with an "export-led human development." As Korea began to seek to compete on a global level, the education it had provided its people became important as people could move more easily in and out of economic sectors. This transition has been important in keeping the economic production of the country high, despite industrial changes that have occurred. As Korea has improved its human capital, confidence in the economy's ability to grow has led to increased physical capital investment(10), which should lead to more growth in the future. Human capital and development of human capital has played a vital role in the development and expansion of the South Korean economy.

South Korean Development Article [Source]

United States

The importance of education cannot be underestimated in the United States either. Following the second World War, the United States became a leader in technological innovation and education. Since that time, however,the United States has begun to slip in educational power in relation to other countries. This preceived slip has become a cause for concern and debate among many politicans and economists. Most of the new boom sectors of the economy are education strong occupations. They include industries like computer software, robotics, avaition, microelectronics and biotechnology among others(11). These are the jobs that have been producing the highest wages and have come to make up a large porportion of the comparative advantage a country could hope to have in the future. While other countries have been taking advantage and producing minds for these sectors, America has seen a drop in the number of people pursuing degrees in these areas. At Carnegie Mellon, for instance, since 2001, the number of students seeking a computer science degree has fallen from 3,200 to 2,000 (12). This trend is seen to be at other institutions as well. This fall means that other countries like China and India will approach the United States as the leader of technology and sciences. If the United States should fall in these categories, the efficiency and production of the United States may be overtaken by competitors, which would hurt the United States' economic standing. If the United States does not maintain itself as a leader of the scientific community, the wealth technology has brought to this country may lost to the next technological leaders. What has made America attractive for investment has been its human capital, a decline in our human capital standing, could lead foriegn investment elsewhere which could hurt the potential of both our current and future economy.

Human Capital Development in America Source

Works Cited for Human Capital Development

Government Policies

Governments have always played intricate roles in the development and production of human capital. Governments for the most part try to maximize the productivity of its human capital; however, sometimes for reasons of restrictive policy and social inequalities, governments have not. Nowadays, governments actively work to shape legislation and regulatory proposals in order to capitalize on its labor force.

• Why do governments choose to provide human capital?

• How do governments capture the investments they make in education, training and research?

• How are such supply-side policies affected by the international mobility of human capital? What kinds of skills and ideas do governments choose to provide?

In the world today it is the information and education - human capital - that will be the driving forces of ‘tomorrow’s global economy’. “If human capital is internationally mobile this raises a dilemma for governments that might otherwise prefer to invest heavily in it. While nations benefit from the externalities produced by human capital, such returns may not be factorable if innovative ideas and skilled individuals can freely cross borders." Source

Expansionary Policies

Improvements in...

- Education
- Health Care
- Employment

Education

Education has become a prerequisite in determining the relative position of a nation. Education levels are at an all time high and this has led to a vast increase in productivity and general strength of human capital. In the US with programs like No child left behind and government investment in public schools increasing every year education continues to be a major factor in the determining ability of a nation to successful utilize its human resources.

Health Care

The availability as well as constant increases in technology have led to better health care across the work force and thus led to a more dependable healthier human source of capital.

Employment and Training Administration

Governments long ago realized the importance of investing in its labor force and the U.S. has been rather effective in transforming its potential cost in human capital to gains. The U.S. Department of Labor, Employment and Training Administration's (ETA) Federal investment in human capital comprises expenses incurred for training and employment services enacted under the Workforce Investment Act of 1998 (WIA); Job Training Partnership Act, as amended (JTPA); the Trade Act of 1974, as amended (Trade Act); School-To-Work Opportunities Act of 1994, as amended (STW), and Balanced Budget Act of 1997, as amended. This investment is made for the general public and the expenses incurred are intended to increase or maintain national economic productive capacity. For the fiscal years ended September 30, 2001, 2000, and 1999, the ETA incurred expenses in nominal dollars totaling $5,725, $5,326, and $5,490 million, respectively. These fiscal years exclude the cost of internal Federal education and training.

A brief description of the programs under each Act is as follows: Workforce Investment Act

§ Youth Activities - Grants to provide financial assistance to States and U.S. territories to design and operate workforce investment activities for eligible youth.

§ Adult and Dislocated Worker Employment and Training Activities - Grants to provide financial assistance to States and U.S. territories to design and operate training programs for low income adults and re-employment services and retraining assistance to individuals dislocated from their employment.

§ Job Corps - Nationwide program carried out in partnership with States and communities to assist eligible youth to become more responsible, employable, and productive citizens.

§ Adult Employment and Training - Grants to provide financial assistance to States and U.S. territories to design and operate training programs for low income adults.

§ Youth Training - Grants to provide financial assistance to States and U.S. territories to design and operate training programs for economically disadvantaged youth.

§ Migrant and Seasonal Farm Workers - Grants to public agencies and nonprofit groups to provide training and other employability development services to economically disadvantaged families whose principal livelihood is gained in migratory and other forms of seasonal farm work.

§ Veterans Employment - Grants or contracts to provide disabled, Vietnam era, and recently separated veterans with programs to meet their unique employment and training needs. Source

Foreign Governments

Japan Unlike Western Societies which are based on the “individual” of “self” the basic characteristic of Japanese culture is that, as shown in the Japanese word ningen, it values the “relationship between persons.” Rather than encouraging intense competition among individuals, the Japanese economy relies on “collegial groups”(nakama shudan) that are various relationships within and between companies. Governments play a positive, supporting role: “In Japan, along with buyers and sellers the government is a member of this collegial group, and the government does not have an adversary relationship with other participants in the market.”

Source [Pyle, Kenneth B. The Japanese Question. Washington DC: The AEI Press, 1996.]

Restrictive Policies

Japan Government policy

Policy of making if increasingly difficult for women to work more than part-time

-After certain amount earned, a woman is taxed in a much tax bracket than a man earning the same amount

Source

United States Government Policy

Ban on research and development over controversial issues.

-Stem-Cell Research

-Cloning Research

Contemporary Issues

United States Government policies effecting human capital

Senate votes more funds to secure Mexican border

The Senate April 26 approved a supplemental appropriations bill (H.R. 4939) that includes an amendment to increase spending for securing the U.S. border with Mexico, keeping the emotional immigration debate front and center despite the differences between the House and Senate on comprehensive immigration reform legislation.

The amendment allocates an additional $1.9 billion this fiscal year to improve border security technology, replace outdated border patrol vehicles and increase training for U.S. border and customs officials.

No major breakthroughs have been announced in the differences between the two chambers on major changes to handling existing illegal immigrants or about future immigration. The House has backed a hard-line approach that would make criminals of those in the country illegally and would increase punishments to employers that hire undocumented workers, whereas the Senate and President Bush are seeking ways to allow some of them to gain citizenship eventually.

Opposition to Bill: Immigrants contribute

On April 25, the Senate Judiciary Committee renewed efforts to push for passage of S. 2611 with a hearing on the economic impacts of immigration. During the hearing, a panel of experts testified that lower-skilled immigrant workers could impose additional costs for governmental services at the state and federal levels. The panelists noted that the costs would be marginal and, in the long run, immigrants—even undocumented workers—can contribute significantly to the U.S. economy.

“The U.S. economy does face a modest net negative fiscal impact from all low-skilled workers, and not just immigrants,” said Dan Siciliano, executive director of the Program in Law, Economics and Business at Stanford Law School. “But the United States needs these workers to support the higher-skilled and higher-paid employees who drive our nation’s economic growth.”

Some estimates claim that as many as half of the immigrants arriving in the United States every year are undocumented workers. Siciliano went on to say that this means that one out of every eight workers who will enter the U.S. workforce over the next 10 years will be an undocumented immigrant.

“Many of the harder-to-fill jobs are already associated with immigrant labor; for example, construction, agriculture, meatpacking and hospitality workers. A growing number of immigrants, however, are also filling jobs in fields that are vitally important to serving America’s aging population, such as home health care,” Siciliano said. “This clearly indicates that while policymakers debate the relative merits of various immigration reform proposals, immigration beyond our nation’s current legal limits has already become an integral component of U.S. economic growth and will likely remain so for the foreseeable future.”

“Economic analysis shows that the gains to workers who are native to the United States will exceed the losses that the immigrants initially bring,” Freeman said. “So immigration, like trade and capital flows, is a net boom for the U.S. economy.”

The testimony during the hearing appeared to support senators who have pushed for a more moderate approach to immigration reform and legislative proposals that encourage rather than inhibit immigrant workers from joining the U.S. workforce. S. 2611 includes several provisions that were favored by Bush, such as a guest worker program. The legislation features a new path to citizenship for the estimated 10 million to 12 million undocumented workers who are in the United States.

Title VI of the bill would establish a program allowing undocumented immigrants who have lived and worked in the United States for at least five years to apply for a permanent resident status, and eventually U.S. citizenship. Critics have labeled the “legalization and authorization” provision of the bill an “amnesty program” for immigrants who have entered the United States illegally, and conservative leaders have voiced their opposition to the program.

Demonstrations’ effect

May Day Walkout

Thousands participate in order to show the importance of Immigrants in US economy.

A series of large demonstrations supporting less restrictive immigration policies and protesting the stiffer enforcement provisions of H.R. 4437 did get the attention of many members of Congress, according to sources familiar with the issue.

“I believe there are some conservative members of the House who really sat up and took notice when several hundred thousand protesters took to the streets of cities like Chicago and Phoenix,” said Douglas Rivlin, director of communications for the National Immigration Forum. “These were some of the largest demonstrations ever held in these cities, and that definitely made a statement.” Source

The Structure of Human Capital

I will be looking at the structure or workforce of human capital, selecting Japan and the U.S. in order to compare extreme differences.

By using the term structure, our group means contracts, worker's demeanor, and the relations between workers and employers which result in the production of goods

Specifically speaking, I want to look at how different societies determine the value of human capital. We will be looking at employment statistics and population statistics in the US and Japan, and then describe the Japanese salaryman in comparison to an American company worker. We will conclude by taking economist Paul Krugman's comments on the Japanese economy into view in order to gain a greater perspective on the effect of Japanese society on its economy.

Statistically Breaking Down the Labor Force

Statistics

Analysis

Unemployment Rate: While Japan's unemployment rate has been consistantly lower than America's, in the past 10 years, it is important to call attention to the definition of what is unemployment in Japan. While people are employed, they are not being employed in full time jobs, and the unemployment raise has risen recently.

Working hours: traditionally Japan has been known as the home of the world's "working samurai." At the office by 9am, out at 11pm, Japanese workers are seen as both productive and dedicated. As seen by the recent numbers, however, American workers are not that much different.

Job Changes: Due to lifetime contract (of the past), workers could not switch companies, because to do so would mean forgoing benefits and losing face. Nowadays, however, the numbers speak of a different working force who are more willing to change jobs.

Overall Japan and the US are different environments for human capital. The unemployment numbers vary greatly, as well as the fact that workers in Japan are starting to take temporary employment over the lifetime employment contracts. These differences indicate two different cultures and employment systems.

Contract Structure

America:

"Survival of the fittest" best describes the American labor contract. If you have the skills to get a job done, and you are offering those skills at a competitive price, you will get the job. Wages will be driven up if your skills meet a specific need.

Japan:

These contracts are not "market" contracts like American contracts. Lifetime employment is based upon loyalty and the promise of increasing wage as long as you stay with the company. If you quit your job, in past Japan, it was and still is very difficult to find the same position (high up the ladder) at a competitive wage. This limits "job hoppping" and keeps salarymen with one company their entire life.

The Worker

America: Much like in the diagram above, people are hired based on skill and their fit to the job. It is possible to change jobs or professions and still make a competitive salary. The workday for a company man is the typical 9am-5pm job. There is some overtime work when needed, but family time is regarded as sacred.

Japan: Using the above as a base example, the Japanese worker has a different lifestyle. The most stereotypical name for the Japanese company man is the "salaryman." In general, a salaryman can be defined as the Japanese company worker who takes a lifetime employment contract, works up the company ladder, and retires around the age of 60 with a lump sum.

Example

The Contract

American Labor Contract: I am going to use the Keynsian model to describe wage determination. In this example, wage is set based on the efficiency wage model. The wage selected is where the firm chooses the best effort/wage tradeoff point is.

The main idea here is that the firm will employ workers at a wage that meets the amount of effort they demand. Market interaction of labor supply and demand does not determine the wage because it is at a lower effort level than demanded by firms. The end result is a level of employment which is lower than that supplied at higher than market clearing wage. Unemployment is therefore unavoidable in this model. Still, it is important to note that one does not need to work up the company ladder in order to obtain a high wage. A worker can job hop, or quit one job and be hired at another company doing just about the same work for around the same salary. This is all determined based on the effort salary curve and the wage paid for the desired amount of effort the situation in question.

Japanese Labor Contract: The difference here is in the pyramid system described from above. Most company men are hired straight out of college for a certain salary. Background knowledge is more or less erroneous, just as long as the candidate fits into the company mold. The longer a worker stays with the company, the more promotions and raises that worker receives. If the worker is to voluntarily quit, he/she cannot simply jump into another company's "pyramid." That person would start at the bottom, if even hired at all. This can be shown graphically by adjusting the curves above.

This graph illustrates a common belief (although probably a bit outdated) that Japanese workers, at most any position, put out a greater effort for less wage. We will use this assumption when comparing American and Japanese labor contracts for the time being, believing that it is this hard working characteristic that inspired the post WWII Japanese economic boom.

This graph shows the labor wage situation in a typical Japanese company. Note that every worker in this situation must start at Situation One. Here there wages and effort are lower than the other two situations but the effort per wage ratio is much higher than in the other two. The only way to reach Situation Two is to be promoted from Situation One, and to reach Situation Three, one must be promoted from Situation Two. The higher the promotion, the more wage one receives and the change in wage received will exceed the increase in effort demanded for each promotion.

This graph is useful in depicting the different wages and labor levels of each situation compared both to each and other and to the market clearing wage level. As shown here, the higher up one goes, the less the labor hours are or the less positions available exist. This depicts the Japanese salaryman situation perfectly, showing that promotions raise the wage, while not everyone gets those promotions, and the effort per wage decreases with each promotion.

Conflict: Which System is Better?

Japan, especially in the 90's, suffered and is still suffering an economic recession. It has not been until just recently that the land of the rising sun has shown some sort of economic recovery. In looking at the reasons for the recession, many cite structural problems as the source of the issue. Things such as lifetime employment, the "salaryman," long term contracts, and a higher than normal MPS are blamed for current stagnation.

The question is, should Japan structurally change their employment practices to those of the US? Should lifetime contracts change to market contracts? Should wages be left more to the market and less to in-house wage setting? Should job hopping be encouraged?

Economic recovery has come in the last couple of years in Japan, but in a form most Japanese were not used to. These improvements were actually buyouts of Japanese companies by foreign investors. Seeing promise in the Japanese environment, many foreign companies and investors are willing to buy Japanese buisnesses which are suffocating in debt, lay off some employees (a traditional Japanese business taboo) and rake in profit. Foreign companies are implementing the western (or in my description the "American") employment structure. That is, no guarunteed lifetime employment, and hiring from the outside.

Argued by some, these structural changes may hold the key to Japanese economic improvement. Then again, these changes might not. Afterall, the Japanese rose to economic power based on this new inventive system of employment. Japan's strongest resource is its labor force, and this system harnessed that power in a profit gaining way. It is not as if the "American" system is flawless. America is currently facing a period of outsourcing, where jobs are lost to cheap labor countries. Immigration is also driving down wages, making it hard for many Americans to raise their standard of living.

In consideration of these things, Paul Krugman wrote an article entitled "What Is Wrong with Japan?" In the article Krugman believes that Japan can overcome any of these "structural" problems without rearranging the structure. That is, instead of trying to eliminate traditional Japanese business practices, Krugman believes the Bank of Japan can restore economic progress. It is from lack of demand that Japan is suffering- the fact that the country's production capacity is not being met due to a lack of demand. Traditionally, the Japanese save more, thus causing that demand lack.

Krugman believes that the lack of demand can be solved if the central Japanese bank increases the money supply. This way, people will have their hands on more money, will start spending it, and the demand problem will be over. Sounds easy enough except for a term called the liquidity trap. That is, Japanese interest rates are seemingly as low as they can be, and lowering the interest rate further may cause a negative interest rate or not do anything to stimulate any more demand. In other words, many bankers believe that the central bank of Japan has done all it can.

Krugman denies this belief. He believes that by printing more money and causing some inflation demand can be stimulated. Krugman writes that Japanese officials are too afraid that the speculation which existed in the 80's (causing the "bubble to burst") will happen again. Due to situational differences, Krugman concludes that inflatioin here would help, and that Japan should not "bang its head against the wall" worrying about structural changes, but to simply print more money and get the economy back on track.