Cracker Barrel on Regulating Responsibility

Business and the Environment

When t ≠ T.

Ben-Porath (1967) asserts that human capital is earned based on a given time horizon that expires at a known labor market exit point – retirement.  (Or, in the model, when t = T.)  In this case, increasing one’s individual human capital is a rational investment that requires weighing of earnings from entering the labor market today or entering after some time spent out of the labor market acquiring skills (via higher education).  Last week’s piece by Granovetter (2005) on the impact of social structure on economic outcomes becomes relevant when considering the amount of human capital that can be built by going to a graduate school where you can build a network of future employers.

Ben-Porath’s key finding is that, “The basic model generates some of the qualitative characteristics of the observed life cycle of earnings – typically, an initial period of no earnings followed by a period in which earnings rise at a declining rate and, eventually, decline.  Actual, or observed, earnings turn out to be always lower, to change faster, and to peak at a later age than the attainable maximum, the earning capacity of the individual” (352-353).

Ben-Porath’s argument is interesting and empirically sound if you consider that T really does mean that human capital generated no longer holds any value.  This argument is refuted by various organizations that value retired individuals that still have skills to contribute; the PeaceCorps, ACDI/VOCA and Wal-Mart greeters are all jobs that individuals beyond retirement age can continue to work in.

Whether T is a finite time horizon or not will probably have little impact on the rational decision of an individual to acquire human capital.  While various jobs exist to employ retired individuals, it is unreasonable to think that an individual would invest in their own human capital because they aspire to these positions – PeaceCorps volunteer, etc.

References:  Ben-Porath, Yoram. 1967.  “The Production of Human Capital and the Life Cycle of Earnings.” The Journal of Political Economy. Vol. 75. No. 4. Part 1. pp. 352-365.
Granovetter, Mark.  2005. “The Impact of Social Structure on Economic Outcomes.”  The Journal of Economic Perspectives.  Vol. 19. No. 1. pp. 33-50.

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