ECONOMICS OF HUMAN CAPITAL is NOT about the problem of estimating the value of a human life in a sum of

money, as in Stephen Amidon’s 2005 novel  when a life is injured or lost, how much has to be reimbursed? (there
is an economic value even in losing a human life).

The ‘economics of human capital’ has been focused on that problem until the late 1950s; thereafter the focus
enormously widened embracing the economic drivers and consequences of population’s ‘quality’, in other words
it is concerned with economic drivers and economic consequences of population’s quality = what kind of
ECONOMIC DECISIONS affect the quality of people’s life?

EoHC concerns a process connected with QUALITY  it’s a multidimensional concept, which involves many
dimensions, of course:

• age structure

• physical and psychological health and strength

• personal ethics

• social ethics

• intellectual capabilities (skills & knowledge)

1) EDUCATION – Quality depends also on what you are capable of, how much you are cultivated 
EDUCATION and CULTURE (from Latin “educere” bring out from a barely natural condition to a more
defined way of living). It’s more than simply schooling; it depends also on family interaction and continues
on the job.

For this reason, CULTURE would be better: all the activities to prepare lad for crops  CULTURE = KNOWLEDGE
AND SKILLS (it’s much more!)  People must be cultivated in this sense: knowledge and skills are embedded in
them.

Quality of life is what you consume, how you spend your time (depends on consumptions and health).

HOW CAN WE MEASURE EDUCATION OR CULTURE? (and all the qualitative aspects)

- Direct way of measuring (PROXY)  measuring a multidimensional aspect drawing attention on something
specific  SCHOOLING
- On an ordinal scale (less-more)

Many of these qualitative aspects can be measured on an ordinal scale (less-more) either directly or using proxies:

• For the age structure, we may consider the dependency rates

• For physical health, we may consider life expectancy, mortality from a particular disease, malnutrition,
overweight, expenditure on health

• For moral health, we may consider suicides, alcohol consumption, criminal activity...

• For skills & knowledge, we may use the adult literacy rates, the average years of schooling, consumption of
cultural goods, registered patents, hours of on-the-job training, ...

What proportion of the population is illiterate, has primary attainment, and so on (we put numbers to have
measures)  Economists make schooling and education match – but schooling is different from results  you
should look at the results of schooling (how much do people learn?)

*GDP = PIL  indicator of how much is produced in a country  it depends on different things, including human
capital and education.

MEASURE: for skills and knowledge, we may use the Adult Literacy Rates, the average years of schooling,
consumption of cultural goods, registered patents, hours of on the job training, …
 2) HEALTH and LIFE EXPECTANCY  physical or psychological
MEASURE: for physical health we may consider life expectancy, mortality from a particular disease,
malnutrition, overweight, expenditure on health, …

Economic drivers and consequences of Health and Education  USE OF RESOURCES AND TIME (e.g. to study or not
to study is an economic decision). Economic drivers of education: we want to be more successful to earn more 
people are more productive (economic evaluation)  how is the productivity evaluated? How much is this effort
worth in euros?

For HEALTH it is the same: you need time and resources (expenses for health are related to people’s incomes).

Consequences: life expectancy (it’s a typical PROXI for health). There are connections between education and life
expectations – education brings higher wage, so life expectancy becomes longer

3) AGE STRUCTURE of POPULATION: demography changes very slowly but it has big consequences and as
it is slow, people tend to ignore it (as a big elephant).
Natural demography: consider the group of people who works  15 – 65 (working age) – main reference
from the demographic point of view. Comparing with young and old people we can calculate the
depending ratio and compare it with other countries.
Social demography: migration

MEASURE: for the age structure we may consider the dependency rates.

4) ETHICAL QUALITY OF PEOPLE

- Personal ethics: self-respect, sense of beauty (wise use of resources, efforts to become a better person
 ethical motivation)
- Business ethics (SOCIAL ethics): try to earn the most you can without cheating, staying within social
boundaries.

We may distinguish four key economic questions for society:

• How much do we produce? (output, income) – Pollution, oil consume, other consumptions, …
• How do we live? (living standards: time use, consumption etc.) – living standards, how we live is conditioned by
what we produce (depending on what the market demands)
• Who are we? (population quality) – allocation of resources (how do we use what we produce)
• How unequal is society? (distribution)

There are many mutual relationships between output, living standards, population quality and distribution.
Population quality is the central concept, at the crossroad of all economic processes  ‘quality’ entails economic
choices: improving ourselves requires effort, sacrifice and the use of resources.

This is not to deny that the moral virtues of a human being have other and more important drivers:

• The classical ‘cardinal virtues’: Prudence, Courage, Temperance, Justice  ethical drivers as well.
• the 7 gifts of the Holy Spirit of the Christian tradition: Wisdom, Understanding, Counsel, Fortitude, Knowledge,
Piety, fear of God)
• the 36 Islamic everyday virtues (such as Charity, Forgiveness, Tolerance, Honesty, ...)

Nor is it to deny that the heroic virtues of many people are completely independent of their economic condition.

 Yet any improvement in ‘quality’ on a permanent basis (human progress), that can be transmitted to future
generations, does involve a wise and rational use of resources and much effort and sacrifice by the present
generation.

In this context, we should also evaluate how well free market regulates such a resource allocation and what are the
best remedies to the market failures in achieving human progress.
The economics of human capital analyses the economic drivers of population’s quality from a particular point of
view:

• It emphasizes the choices concerning education (mainly), health, migration (to a lesser extent)

• It assumes that such choices are driven by an expected economic return and are perfectly rational

• It largely leaves outside their non-market effects (i.e. the effects not incorporated in returns) and their non-
economic (e.g. ethical) drivers

• The theoretical framework is strongly interconnected with the empirical findings

POPULATION, INCOME, LIFE EXPECTANCY AND EDUCATION: SOME

STYLYZED FACTS
Population in working age is the engine of economics: ENGINE is to serve something much wider  not economical
= HUMAN PROGRESS  do we really have progress? People destroy things without thinking at the value. Ex:
Detriment of the environment.

Effects of market behavior  negative externalities

Today, 2 emerging PHENOMENA: climate change and massive migration (always in the history of humanity) 
process moved by differences that deletes these differences. Inequality is an obstacle to human progress!

Economic progress goes together with the ageing of the population  negative!

How well this engine help improve equality of people’ life? Why do we need to analyze it?

We need resources, but there is scarcity. If we invest in HC we must devote time and efforts (if you want A, you
must give away an amount of B).

Let us start with a bird eye view of recent developments in the main regions of the world concerning population
quality, against the background of economic performance and social inequality.

In a nutshell, we shall see that:

i. There has been in the past 50 years or so an improvement in many dimensions of population quality, in all
regions. In parallel, per capita output increased;
ii. The is some convergence towards education and health indicators of the leading countries  some regions
of the world are catching up  are they becoming more similar? There is convergence when differences
narrow and when ratio tend to 1 (Ex. Per capita income in Italy and Ghana or Algeria). Concerning
convergence, we look at the ratio, not at differences: IT per capita income 100 / Algeria 50  difference 50
but ratio 100/50=2. If we consider life expectancy instead, we should look at differences, as well as for
schooling.
iii. Yet, there is no evidence of a reduced income inequality; to the contrary, there is clear evidence of
increasing inequality, since the 1980s (but it is true that countries where average education is higher tend
to have a lower income inequality). How strong is inequality? In education, it is reducing, but income
inequality is INCREASING. We should remember that education improve income possibilities while
increasing market performances.
iv. Labor market participation and performance increase with educational attainments

OECD Countries: North America, Mexico, France (in South America), Europe (but not Balkans), Turkey, Israel, Japan,
South Korea, Australia, New Zealand, Chile.

Division in Macro Regions:

 Caribbean and lain America

  Sub-Saharan Africa
 North Africa and Middle East (Iran is sometimes included or not)
 South Asia
 East Asia and the Pacific
 Europe and Central Asia

POPULATION QUALITY AND PER CAPITA OUTPUT

Let us consider the school enrolments by world regions, 1970-2015, in primary, secondary and tertiary education
(which a different concept from achievements).
𝑒𝑛𝑟𝑜𝑙𝑙𝑒𝑑 𝑝𝑒𝑜𝑝𝑙𝑒 𝑜𝑓 𝑒𝑛𝑟𝑜𝑙𝑚𝑒𝑛𝑡 𝑎𝑔𝑒
NET ENROLMENT RATE =
𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑛𝑟𝑜𝑙𝑚𝑒𝑛𝑡 𝑎𝑔𝑒
𝑡𝑜𝑡𝑎𝑙 𝑒𝑛𝑟𝑜𝑙𝑙𝑒𝑑
GROSS ENROLMENT RATE =
𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑛𝑟𝑜𝑙𝑚𝑒𝑛𝑡 𝑎𝑔𝑒

- South Asia made a big progress

- Sub-Saharan Africa improved but not as much as the others  still divergence

There is a big question about quality of education.

 - No evidence of convergence: but this is what actually matters  the spread of high-level education
- What happens? People migrate if their economy does not give enough to them.

Consider that: in all regions there has been an increase in access to schooling at all levels. There are leaders and
followers, and there is a clear catching up at the primary level; some at the secondary level and nothing at tertiary
level.

Consider next life expectancy at birth as a synthetic indicator of health conditions  life expectancy at birth =
number of years a newborn infant would live if prevailing patterns of mortality at the time of its birth were to stay
the same throughout its life.
There is substantial convergence over the entire period for South Asia, East Asia and Pacific and North Africa and
the Middle East  Convergence of Latin America and the Caribbean is concentrated in 1960-2000, while
convergence of Sub Saharan Africa is concentrated in 2000-2015.
More detailed health indicators introduce us to a more nuanced picture:
• Health expenditure (PPP $ per capita of population)  is made comparable by using PPP method (PURCHASING
POWER PARITY = current international dollar). Sub-Saharan Africa improved less and has the smallest expenditure,
South Asia is second worst region).
• Malnutrition prevalence (% of children under 5)  weight for age
• Overweight prevalence (% of adult population)
• Mortality from various diseases (% of population 30-70)  CVD, cancer, diabetes…
• Per capita income (GDP per capita, PPP method) improved as well, but again convergence is limited
• The global imbalances of education, health, income are important drivers for migration flows across regions (even
though within-region migrations are far bigger)  net migration: migration is mostly within regions.
Migration flows compensate the global imbalances in the age structure of population  + health and education (as
migration determine a global increase in education, health and per capita income; the limitations on mobility can
be very inefficient!
Notice that, from the standpoint of migrants, the expenditure needed to migrate is an investment in human quality:
in a different place one, can be a more productive (a better?) man/women/boy/girl. Of course, such an investment
is not exempt from risks (as any other investment)  best investments to have outcomes, a return in the market.
Overall, the index of ‘human development’ calculated by the UNDP sharply increased in the past 30 years or so,
even though inequalities remained very high.
USE OF RESOURCES  WHAT IS THE RETURN? (Education, health and so on are consumption components and
investments components).
Saving money in the future could help, more prevention means less money spent (e.g. concerning health).
Migrants borrow and spend money to migrate, the same for treating personal health and for education. Every time
there is an expected return on investment, its reasonable to borrow money (RETURN FROM MIGRATION, HEALTH
AND EDUCATION)  but there are also risks!
Migration, health and education are relevant for economics -_> they have consumption components but also
investment components, people are the subjects as they embed resources. Evolution tends to flat differences 
as well as people movements and capital movements tend to reduce them.
DIFFERENT AGE STRUCTURE COMPOSITION: in immigration and emigration. Age structure means demography,
death rate and young and old dependency ratio.

Labor age: 15 – 65
It is a ratio where at the denominator we have people 15-65 and at the denominator people older than 65.
 𝑝𝑒𝑜𝑝𝑙𝑒 65 +
𝑝𝑒𝑜𝑝𝑙𝑒 15 − 65
In all regions, this ratio is increasing, because life expectancy is increasing as well, and the denominator
tend to decrease as a delayed effect of a decreased fertility. This ratio is increasing more in those countries
where the ratio is already the highest, which means that are becoming “older” and they are also richer:
better economic possibilities (destinations for migrants)

All are falling because fertility diminishes and people are becoming older  the numerator diminishes.
𝑝𝑒𝑜𝑝𝑙𝑒 15 −
𝑝𝑒𝑜𝑝𝑙𝑒 15 − 65
In principle, emigrations determine a global increase in education, health and per capita income;
limitations on mobility can be very inefficient! 2nd generation of migrations share characteristics of the
receiving country.
Funding father of economics: Smith Adams  1776, book: in UK at that time poor laws  debate on
reforming them. Regulate situation of poor people. Handled by parishes (limited). He opposed to that
regulation  movements are efficient. People can get better opportunities of going out of poverty.
System of walls that limits migration is inefficient.

Human development index increased (South Asia: faster increase!)

 - What moves governments in investing more for human developments?
- What variables affect people’ decisions?
There still are big inequalities in human development outcomes around the world  becoming more and more
unequal. Richest countries improve faster, no clear evidence of convergence + increasing inequality even within a
country.
Comparison across countries ignore internal differences and we use averages.
2nd way: we can look at inequalities within countries or regions (increasing – social inequalities)  dates back to
1980, with neo liberal policies around the world. Return to laisse faire prescription.
INEQUALITY
Inequality in education is seen in relation to average HC (represented by a PROXY).
Across countries, the index of inequality in educational attainments is inversely related with average education and
average education increases with per capita income.
- Within a (progressive) economy, we expect therefore that inequality of education diminishes as per capita
income and average education increase.
- Does it follow that also inequality of income diminishes? Not so in the many progressive economies: to the
contrary, it increased in the past 40 years or so!  Let us keep this paradox in mind for future reference.
Average HC in 1 country: represented by average years of school
Inequality in education: GINI index educational attainment  we consider population of a particular age range in a
country and study their population attainment distribution.

 DISTRIBUTION OF EDUCATION
1. Model of distribution: it is the most frequent value (10 – highest value)
2. Mean of distribution = average
3. Medial of distribution = number of years of education of a middle person in an educational sense)
GINI index: measure of how unequal is distribution (very high if a lot of people have low education).
If we consider all countries, we find that inequality in education is inverse related with average education. There is
less inequality in countries with high levels of education.
AVERAGE EDUCATION INCREASES WITH PER CAPITA INCOME
Within a progressive economy, we expect therefore that inequality of education diminishes as per capita income
and average education increase. In rich countries should be lower!
TIME SERIES: within a country (regions)  high school / college  percentage of the population 25 years and over
(selected years 1940 – 2015).

Does it follow that also inequality of income diminishes? Not so in the many progressive economies; to the contrary,
it increases in the past 40 years or so.
LABOUR MARKET PARTICIPATION
The above-mentioned paradox is even more surprising if we consider the labor market outcomes by educational
attainment. People participate when they are active (employed or looking for a job – unemployed: one who does
not find a job, is looking for it)
Education has a strong positive effect on labor market participation and a negative effect on unemployment. Also,
it has a strong positive effect on earnings.
𝑖𝑛𝑎𝑐𝑡𝑖𝑣𝑒 𝑝𝑒𝑜𝑝𝑙𝑒 𝑜𝑓 𝑎𝑛 𝑎𝑔𝑒 𝑔𝑟𝑜𝑢𝑝
INACTIVITY RATE = (RATIO)
𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑡ℎ𝑎𝑡 𝑎𝑔𝑒 𝑔𝑟𝑜𝑢𝑝
𝑝𝑒𝑜𝑝𝑙𝑒 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑜𝑓 𝑎𝑛 𝑎𝑔𝑒 𝑔𝑟𝑜𝑢𝑝
EMPLOYMENT RATE = (RATIO)
𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑡ℎ𝑎𝑡 𝑎𝑔𝑒 𝑔𝑟𝑜𝑢𝑝
𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑜𝑝𝑙𝑒 𝑜𝑓 𝑎𝑛 𝑎𝑔𝑒 𝑔𝑟𝑜𝑢𝑝
UNEMPLOYMENT RATE = (RATIO)
𝑎𝑐𝑡𝑖𝑣𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑡ℎ𝑎𝑡 𝑎𝑔𝑒 𝑔𝑟𝑜𝑢𝑝

[Readings] – CHECCHI’ CHAPTER 1 – THE RELEVANCE OF EDUCATION

Investigation into the role of education in modern society.
After 2nd WW: generalized rise in school attendance across the world, enrollment rate rose in development
countries --> educational achievements rose quickly but slowed down during the 1980s.
- 1990s: many countries have the entire school-age population controlled in primary education.
- Worst situation for Sub-Saharan and South Asian countries.
- More pronounced difference for higher education (50% of people have access in developed countries, while only
5% in the poorest countries.
An increase in access to education reduces disparities between countries and within a country  Countries with
higher educational achievements are also characterized by lower differences in educational achievements in the
population, due to the fact that the amount of achievable education has some limits for the vast majority of the
population - as well as it is economical irrational to keep studying after a certain age.
Even though these values are increasing, income inequality is not declining: it tends to be lower in countries where
average educational achievement is higher.
WHY DO PEOPLE DEMAND EDUCATION?
- labor market participation increases significantly when it passes from less than compulsory to secondary
and post-secondary education (Better working expectations for people with tertiary education).
- one is consumption, education is enjoyable, knowledge gives more stimulus (for both personal and social
problems) --> education is vital for having a goof society.
- The other reason is that education is an investment (is demanded as an investment). It is chosen when one
is young and affect the future for the entire time of life. A clear economic evaluation of the return of such
investment is more important.

WHAT UNDERLIES THE RAPID GROWTH IN EDUCATIONAL ACCESS?

- The demand pulls a wider access to education and the market transform this force into prices. There is also
a positive mutual relationship: more education means more per capita income, thus more resources for
accumulation of HC.

WHY ARE MORE EDUCATED PEOPLE MORE LIKELY TO ENTER THE LABOUR MARKET?
- The amount of education received is positively correlated with earnings (a university graduate earns double
the amount of a person who did not attend secondary school) - more education is associated with higher
expected income.
- 2 main determinants: one concerning labor demand and another one labor supply. For labor demand: a
more skilled job is preferred, because his/her productivity is higher and has more has a higher problem-
solving capacity. For labor supply: if you have not invested very much on HC, you are not pressed to work
for the market (you rather prefer to work at home). Housework is more attractive for people with lower
levels of education. If you study more and invested a lot, you want your return.

WHY ARE EDUCATION AND INCOMES POSITIVELY RELATED?

- They are positively related: as long as educational attainments increase, inequality decreases.
- If it is worth going to school, why many families do not invest in it? As more and more people go to school,
the relative advantage of better educated people declines - returns are higher where access to education
is limited.
- Families have financial constraints (relevant mainly for secondary education).
WHY A LESS UNEQUAL EDUCATION CAN BE ASSOCIATED WITH A MORE UNEQUAL INCOME DISTRIBUTION?

- A more equal education comes together with a more unequal income distribution. Once again, much
depends on what happens in the labor market and has to do with earning distribution. Less unequal
education --> more unequal distribution of incomes.

WHAT DOES PREVENT FULL ACCESS TO EDUCATION?

- Lack of resources (people will demand more schooling whenever family resources are high, borrowing rates
are low, access to education is cheap and expected returns are high.
- Educational choices are the mere reflection of family wealth distribution.
- Public resources spent on education raise the enrolment rates.
- Education might not be affordable: economic constraints. At the same time, accumulation of HC means
accumulation of skills and knowledge, but they are not the same for all people. Hence, some people could
have a lower return from education and be discouraged.
SUPPLY OF EDUCATION: publicly provided in most countries.
Central issue in class formation is whether to integrate or segregate students of different abilities.
2 possibilities: equity (equal opportunities for everyone) or efficiency (selectivity and concentration of higher
resources on the ablest individuals).
How demand and supply interact in the education market?
Optimal educational investment when individuals and their familieas differ in terms of talent and wealth. Families
tend to invest as well on private education, which may have an impact on the potential growth rate of an economy
since it strengthens the incentive for HC accumulation.
PUBLIC: it lowers access barriers but it reduces the incentives for richer families to invest more in education of their
children.
We take for granted that HC is productive, marginal cost and marginal benefit are equated --> additional returns
on education can be offered by n increased opportunity fr on-the-job training (typically offered to better educated
workers).

*Market: we have at the 2 extremes the State and the market. After 2nd world war, the market was regulated by
the state (a lot of public interventions). At the end of 1970s, the situation started changing: economic policies, oil
shock --> unemployment, crisis. The remedy has been to give more freedom to the market and less intervention of
the State = Deregulation policies. But: increasing taxation! Thus, there has been a period of growth, but at the same
time it determined a great increase in inequality. Neoliberal policies wanted at the same time to solve problems in
the world, therefore there have been some public interventions for balancing the situation. Then: great recession -
-> doubts about neoliberal attitude. Monetary policy has changed drastically.

It is true that a market must be regulated, but there are benefits for everyone coming from competition.

The market is completely absent in social problems.