Human Capital: Only Megabucks Would Bring Real Returns

Although the issue seems to have been placed on the back burner for now, raising public and private investment in human capital remains a key objective of the Clinton Administration. Over the past 15 years, real, or inflation-adjusted, wages for men have deteriorated, and the rewards to education and skills for both men and women have risen. The evidence has convinced scores of economists and policymakers that money must be directed toward education and training to raise incomes and productivity in the U.S. But how much might a comprehensive effort to raise skills and incomes cost?

An investment in human capital is generally assumed to yield an average return of about 10%. That is, to add $1,000 per year to an individual's earnings, it is necessary to make a one-time investment of $10,000 in that person. Following this assumption, Professor James J. Heckman of the University of Chicago calculates that it would require an investment of $284 billion simply to restore male high school dropouts to their 1979 real incomes. A more ambitious goal--to restore the income differentials that prevailed in 1979, before skill differences began to make incomes more unequal--would require an investment of more than $2 trillion.

President Clinton's failed $16.5 billion stimulus package, says Heckman, would have gone less than 6% of the way toward restoring high school dropouts to their previous positions in the labor market. Clearly, the staggeringly high investments necessary to make a difference in raising human capital are unlikely to be undertaken with public monies. The private sector may have to take the lead in selecting and financing the best programs for training workers.