Human capital theory connects education to the labor market. It posits that more education makes workers more productive, which increases earnings. A more educated and productive workforce subsequently increases the gross domestic product of a nation. This theory has been prevalent since the 1950s and continues to play a central role in minds of both policy makers and parents. You go to school because you will get a better job in the future. The government invests in education because it will have a return on investment in larger GDPs.
My guest today says human capital theory is dead.
Hugh Lauder is Professor of Education and Political Economy at the University of Bath. He specialises in the relationship of education to the economy and has for over 10 years worked on national skill strategies and more recently on the global skill strategies of multinational companies.
Citation: Lauder, Hugh, interview with Will Brehm, FreshEd, 29, podcast audio, July 21, 2016. https://www.freshedpodcast.com/hughlauder/
Will Brehm 0:15
Hugh Lauder, welcome to FreshEd.
Hugh Lauder 0:24
Pleased to be here.
Will Brehm 1:08
Human capital theory is such a common place theory in many respects, because when people think about education, they think of it as for human capital development. What is human capital?
Hugh Lauder 1:54
Okay, so I need to take you back a little to the beginning of the theory. The theory was the first sophisticated account of the relationship between education and the economy, and it said that basically people who were better educated would be more productive. And in being more productive, they would then earn a higher income. So that brought education into the picture because what it required was for higher numbers of people to be educated in order they could become more productive so economies could grow, and their income would also accordingly grow. So that’s the basic idea behind it. And it’s an idea, of course, which has permeated through society. It first began really in Chicago in the 1950s at the university there in the Economics department. And then policymakers took it on board and policymakers thought, “Wow, we’ve got a win-win here. Because what’s happening is that if we increase the opportunities for education, so our economies will grow, so people will gain a greater income.” And at the same time, there’s a kind of connection with social justice. So that, for example, as long as people are prepared to work hard and are motivated in terms of education, then they will get their just rewards. And they’ll get their just rewards because employers will always choose the most talented; those that are likely to be most productive. So underlying what seems like an economic theory is actually also a theory of meritocracy. So that’s the economists, that’s the policymakers. And on top of that, of course, now we have parents and students who are going, “Okay, if I want a good job, then I’ve got to get a good education.” So that’s basically the idea behind human capital theory.
Will Brehm 4:01
And it’s led to some interesting notions in education like this rate of return. Can you talk a little bit about what this notion is?
Hugh Lauder 4:11
Yes, sure. So how do economists know, and policymakers know that this claim that education will lead to increased productivity, which will lead to increased income? Well, not how do they know it, but how do they make that assumption? They make that assumption by saying, “Let’s have a look at the rates of return for different kinds of education and skill in the economy.” And in the past – not now, but in the past – what they seem to have found is that the better educated you are, the greater your rate of return in terms of your income.
Will Brehm 4:52
So more schooling means higher income in the future.
Hugh Lauder 4:55
That was the idea, yes.
Will Brehm 4:58
So it’s like it’s predicting the future in many ways; that’s what they’re trying to do.
Hugh Lauder 5:02
For sure it is. Yes, they really thought that they had a theory which would actually explain and predict the future. And in fact, it has been a theory which has been around, as I said earlier, since the 1950s. And so in terms of social science theories, it’s one of the longest living. But it’s now coming to an end.
Will Brehm 5:27
Before we go into those critiques about the end of human capital theory, can you talk a little bit about what sort of impact it had since the 1950s on education, on education policy, on education development?
Hugh Lauder 5:44
I think the impact has come about in a number of ways. First of all, one of the immediate forms of impact was in development. So the World Bank took on the notion of human capital theory and has argued consistently, since the 80s, that human capital embodied in educated workers would raise the income of countries and of individuals in developing countries. So that was one clear example of the consequence of that particular theory. But, at the same time, it’s also been the case that in developed countries, it’s been seen that if you can increase your higher education system, then you’ll also get a win-win. You get the win-win because people will earn more money as workers and countries will have higher levels of gross domestic product. So these have been the two major consequences of the theory. But it’s also had an extra twist. And that was the notion of the knowledge economy. And the knowledge economy, which sort of started to develop as an idea in the late 80s, also seem to reinforce the idea that we now needed more educated workers. And the more educated workers there would be, so they would become more productive. And this was known as skill bias theory because at the heart of this form of human capital theory was the idea that technology would drive the demand for higher educated workers. So the skill would be biased in favor of the technology and the demand for higher skills.
Will Brehm 7:34
And it would be education that would provide those skills to operate that technology that is driving the economy?
Hugh Lauder 7:44
Precisely that. Yes. Now in more recent times, economists have become a little more sophisticated in one sense and they’ve started to look at particular kinds of skill for which there’s a higher return. But at the same time they’ve been kind of “atomizing” education into particular kinds of skill. So employers have gone in the other direction, and very often look at potential employees holistically. They want to know about their all-around capability in character, rather than also the specific skills.
Will Brehm 8:21
The work that I’ve done in in Cambodia, I’m just amazed by the prevalence of the idea of human capital being the main purpose of education. It is always meant to build and develop human capital because it will increase incomes, and also increase GDPs of the nation. And the conversations that we have are always about this idea of projecting into the future: what sort of economy Cambodia is going to have in 2030, for instance, and what skills are needed? And it just seems like it’s a fool’s errand of trying to predict the skills that are needed in the economy in 2030 for a country like Cambodia that’s rapidly changing; for a global economy that’s rapidly changing.
Hugh Lauder 9:14
Yes, I think this is a very good point. Let me just step back for a moment and say that in developing countries, there are certain sorts of skill that are clearly required for their development. And these forms of skill are to do with the state and state workers. They’re to do with various forms of craft work, so electricians, builders of various sorts, carpenters, that kind of thing. You need those kinds of skill. But the idea that you can predict in 2030 what’s going to happen is more problematic. And it’s more problematic, because just at the time when these developing countries are emerging into the global economy, so many of the techniques which are adopted in the global economy will hit them hard. So, for example, computer algorithms – what Phil Brown, my coauthor, and I have called “digital Taylorism” – that is moving up the skill chain very quickly, and robots. So, for example, if you look at China right now, there are less people in manufacturing in China now than there were in 2000. So in other words, many of the techniques which have been used in the knowledge economy – and actually it’s not the knowledge economy, its knowledge capitalism, because capitalism is always trying to reduce the cost of labor, including skilled labor – many of those techniques that have been developed in the developed countries are now being applied to developing countries. So that makes it kind of problematic as well.
Will Brehm 10:57
Let’s shift to your specific critiques of human capital theory. What do you find so problematic about the theory itself, maybe not the method that’s employed by the theory?
Hugh Lauder 11:11
Okay, let’s have a look at the theory itself. We start with education, and that’s meant to lead to greater productivity, which is then meant to lead to greater income for the individual and the GDP of the country. Well, when we look at that set of connections, we find that they are all problematic. They’re all problematic for this reason: That first of all, education. There’s now considerable split amongst economists as to what we mean by education. Is it something as I suggested earlier, which is a form of all-round development of an individual? Or is it about particular skills? And that debate has really not taken off yet, but it will. So the education itself in terms of human capital – ‘what is the capital’ is a problem. Then when you look at productivity, what we see overall is that there are more and more educated people in the world, more and more educated people in particular countries like the UK or USA, and yet productivity is either flatlining or is very uneven. So the link between education and productivity is now become wholly problematic. Then when you look at the relationship between productivity and income, it becomes even more problematic because what you see is that instead of workers getting rewarded for their productivity, since around 1978 to 1980 in the United States and the United Kingdom, what you see is that increasingly, the wealthy are creaming off the productivity of other workers. So there are problems with all these different accounts of the relationship between education, productivity and income.
Will Brehm 13:10
So this would be the Piketty’s argument of the rise of the 1%.
Hugh Lauder 13:16
The rise of the 1% certainly has been, in part, because they’ve creamed off the productivity of other workers, but we need to look more closely at the relationship between productivity and income than what Piketty was talking about. Because as far as I can see, and read him, he does assume that most of the rest of the income that people get is a reflection of their productivity. In other words, he becomes quite orthodox once he’s had to look at the 1% in terms of his account of wage determination, and I don’t think that’s right. You only have to look at feminist critiques of human capital theory – and I’m thinking in particular now of the work of Antonia Kupfer in Dresden – and you see that there are a whole range of jobs for which it’s very difficult to determine productivity. It’s not only super managers, as Piketty would say, but it’s care workers. How do we measure their productivity? Why is it that women who can be very skilled at care work get such low wages? There’s a whole range of different questions that can be asked about this relationship between productivity and income. And the idea that productivity simply determines income is taken as a truism in orthodox economics. But I don’t think we can take it as such anymore.
Will Brehm 14:48
So let’s turn to the way in which human capital theory has been studied empirically. What sort of critiques do you see in the way in which it’s been studied?
Hugh Lauder 14:59
Well the way it’s been studied empirically – I’ll give you a clear example since you raised the idea of 30 years as a future timeline for prediction. There’s work by two leading economists, Eric Hanushek and Ludger Woessmann, and Hanushek and Woessmann have published a series of papers for the World Bank, the OECD, where they look at the quality of PISA data (this is international test data for different countries). And on that basis, they then predict that in the future if countries can raise their education standards and their educational achievement so this will increase GDP in 20 or 30 years by X amount. And that has become kind of a standard way of analyzing the returns to education in terms of human capital theory. But I don’t need to tell you this, you will know it and so will all your listeners, that that kind of assumption simply doesn’t take into account the real world. We know, for example – and this is often an example I use – that when you compare Korea in the 1950s and Ireland in the 1950s, what you see as two countries with large numbers of relatively unemployed graduates. Both countries then began to take off, but if you look at the path of Korea where much of the takeoff was state led, and is still highly state influenced, what you see is a totally different kind of success story to the story of Ireland, which of course collapsed in 2008. So different trajectories for countries based on different ways of developing them produce different results. So what Hanushek and Woessmann don’t really do is take into account strategy, institutions, all the things that actually make a difference to whether countries and individuals in them do well or not.
Will Brehm 17:16
One of the critiques you you put forward is that human capital theory or the scholars who are using human capital theory often employ methodological individualism. And we hear this quite a bit also in other education research, and I just would like to ask, what does that actually mean?
Hugh Lauder 17:37
Sure. Basically, the assumption of methodological individualism (which is an ugly term, I know), the basic assumption is that the only thing that exists in society are individuals, and therefore it is to the individuals that we look to explain educational outcomes, to explain income, to explain the key features of social life and economic life.
Will Brehm 18:06
And so it neglects things like history, and perhaps the privilege that one could get from his or her parents rather than just their individual unique ability to learn.
Hugh Lauder 18:22
Yes, absolutely, that’s correct. So it neglects history. It neglects the structures which govern our societies such as class, patriarchy, racism. They don’t enter the story at all. And at the same time it neglects institutions, specifically institutions of education, for example; institutions that steer an economy. All that is simply discounted in this kind of explanation, which focuses on individuals.
Will Brehm 18:58
So if we were to talk about alternatives to human capital theory, how would you describe the link between education, productivity and income?
Hugh Lauder 19:08
Okay, well, first of all, these are now very, very complex connections. They’re not at all simple in the way that the original theory assumed. So we need to think about this very, very differently indeed. Let me just come back to the issue of structures and institutions. When you look at, for example, skill bias theory, it says that we understand that in the 20th century, technology was skill biased – that actually what happened was that as technology developed, so the demand for skills increased. But when you look at the history, it can be read completely differently. And it can be read like this, it can be read: Well, actually, the basis of 20th century industry was Fordism, the idea that people could put a nut on a bolt on a production line and out would roll many cars, many televisions. All the consumer goods that we now take for granted. These people were not up-skilled, they were de-skilled, because originally the people that made the cars were craftspeople. So that’s where you have what they call “skill replacing”, where the technology replaces the skill, doesn’t enhance or demand an increased skill. So then you say, “Well, where did the skill bias, the skill enhancement and demand for it, come from?” And actually, it came from the large numbers of white-collar workers you needed to run a large corporation like it. So these are the people that did the marketing, these are the people that did the accounts, these are the people that did all the other finance work and the planning.
But in order to understand how those corporations grew, you also then have to go to a much wider political economy. You have to go to a political economy which talks about the structures of the labor market – and here we’re looking at trade unions as well as employers. And back in the 50s, for example, and the 60s, trade unions were very strong, and they could increase their wages so that their workers could then buy the cars that were rolling off these production lines. Now, you’ll see for a moment there that the story I’m telling is a very much more complicated story than the one that skill bias theorists assume. Now, they assume that because in the past, we have had skill bias theories, so we will in the future. But the political economy around skill and skill development has now changed dramatically, and we need to understand it in terms of globalization, not in terms of Keynesianism and the idea that you could get some kind of agreement between trade unions, employers and the state, because now trade unions are much weaker, for example. They’ve been weakened through neoliberalism.
So you need to tell a completely different story. And you tell a story now about globalization and the demand for skilled workers can occur anywhere; it doesn’t have to be in any particular country. Multinational companies can simply say, “Okay, these skilled workers we want, they’re cheaper in Shanghai than they are in London. We’ll shift the demand to Shanghai.” So you can see that we’re living in a very, very different kind of world in which the sorts of prediction that human capital theorists made, or assumed they could make, simply no longer exist in that particular way. So we need a different kind of theory. But – and here’s the big but – the world we’re about to enter is going to be even more radically different from the one I’ve just described.
Will Brehm 23:16
Hugh Lauder 23:16
Well, robots. People make a lot of robots. And I used to be very skeptical about this. But I’ve just been talking to very senior infocom officials in multinational companies, and they tell me they’re scared of the consequences. And if they’re telling me that, then I’m really beginning to sit up and look at the other studies which suggests that robots can take many of the jobs that skilled workers used to take. We are moving, I think, into an era in which jobs and income will become increasingly uncertain for many, including many graduates. And that requires us to rethink the entire relationship between education and the labor market, because the labor market is so radically changing.
Will Brehm 24:12
Right. It’s fragmented and global, and you see further changes in the future.
Hugh Lauder 24:17
Absolutely. And they’re going to cause policymakers huge problems, which I think they’re reluctant to really start thinking about and confronting.
Will Brehm 24:28
Before we we turn to, “What then of education?”, you use this term, “the global auction for jobs”. Can you talk a little bit about that?
Hugh Lauder 24:38
Yes. So this is a book that Phil Brown, and I wrote with David Ashton back in 2011, which has kind of taken off a bit, and it’s taken off because up until then, the assumption was that technology would always lead to an increase in demand for skilled workers, and particularly for graduate workers. The research we did was on the skill strategies of multinational companies. And they told us a very, very different story. And I’ll give you an example of that, and it goes like this: The first interview that we did was with a human resources, very senior executive for a German engineering company in Germany. So the interview was in Germany; multinational company, though. And I said to him, because I have still had the human capital thinking cap on, as it were. I said to him, “Do you have a shortage of engineers?” And he said, “No”. And I said, “Do you get them from Germany?” And he goes, “No”. So I said, “Do you get them from England?” And he goes, “No”. And I said, “Do you get them from America?” And he said, “No”. Now you can see how my mindset was. I was thinking, Germany, Britain, America, right?
Will Brehm 25:58
Right, the place where engineers you thought were being produced.
Hugh Lauder 26:01
Exactly. And I said, frustrated, “Okay, where do you get them from?” He says, “We get them from China, we get them from India, we get them from Russia, especially if they’re computer engineers and mathematicians. And we get them from Bulgaria, because in the Soviet bloc, this was designated as the leading place for computer analysis and development.” And in that moment, our eyes opened to a whole new world that this guy in two sentences had given us. And that meant that we had to then get on airplanes, and go and interview executives of multinational companies from around the world to see what was going on. And two things were going on: First of all, because they are in such an intense competition, they’re always seeking to drive down costs, and brainpower they want to make as cheap as possible. So “cut price brainpower” we call it. Now you get that because you can get engineers, for example, in China and in India, for a fraction of the price you can get them in the West. So what you see then is the offshoring of jobs, or the movement of jobs, from particular countries like the United States and the United Kingdom to East Asia.
But at the same time, we picked up something else that was going on. And that was this notion of digital Taylorism, the idea that you can take skilled work that graduates used to do and you can break it down into discrete tasks, standardize it, routinize it and then put it into algorithms that you can ship across the world so that work can be done anywhere. So these are the two key features of the global auction. Now, there is one exception to this and that is at the same time as we’re producing all these graduates, highly skilled workers from around the world so then in comes a particular ideology which suggests that it’s only the very few of those graduates who are really talented. And so now on every bookshelf of every HR executive office that we went to, was this War for Talent book. And this is about how you recruit the most talented in competition with your other corporates. So this is the one exception: there are a few people who are now designated as talented. Now, there’s a major debate as to what’s really going on there and whether these people really are talented, or whether it’s just executives or corporations wanting to see a kind of great reflection of themselves in the younger new recruits coming into their company. Because, of course, these people designated as talented earn much more money than everyone else. So that’s the global auction in a nutshell. And that began to open up two debates related. The first was, “No, we don’t live in a knowledge economy. No, if you’re a graduate, you’re not going to enter a world where you’ll be highly rewarded necessarily, where you’ll have status, creativity and autonomy. Quite the opposite might happen, that you’ll be entering routinized work.” And alongside that, and following from that, is the idea that actually knowledge work itself is now being stratified. So that you’ll get an elite which is the talented, you might get another group beneath them that do their bidding, and then you’ll get these routinized workers. So that was why the book cause something of a stir, because we were arguing, for the first time I think, that the idea of the knowledge economy and of human capital and skill bias theory really didn’t work in the way that had been assumed.
Will Brehm 30:01
So what then of education? How do we make sense of education in this this world that you are painting for us here?
Hugh Lauder 30:09
Okay, this is, I think, a really important question. Because if you were to just think that we’re talking about today and tomorrow, then there could be a critique which comes in, especially from the right wing, which is: “Oh well, we’re just educating too many people to too high a level.” And in itself, that is problematic, because what else are graduates going to do when in countries like the United States and Britain, we no longer have the forms of industrialization where people could do high skilled, high paid work that, for example, still obtains in parts of Germany. So that’s one problem, but there’s a much bigger problem on the horizon. And I kind of signaled it when I talked about the robots. Because if so many of the skilled jobs that we have are going to be done by robots, then what’s going to happen to graduates? What’s going to happen to those who are educated? And I think the answer to that is something like this: We are going to have to give people a basic wage, a universal basic wage. Because the insecurities in the labor market will be so great that many will simply not survive unless they get a universal basic wage. Now, that universal basic wage will enable people to do a number of different things. It will enable them to retrain, to re-skill, for which they will need learning accounts so that they can draw on an account to upscale where they see a need. It will enable them to innovate and to develop different ways of interacting with this world. And the universal basic income will expand the labor market from beyond the confines of a market to work which is seen as important and contributing to society. And of course, care workers would be a clear example of that. So, that’s the labor market part of it in a nutshell. Then what about education? Well, if we’re thinking about that world, and you reflect on that for a moment, the uncertainties of that world, then clearly we need people to be as best educated as we possibly can make them. We need people who are reflective, alert, resilient in order to be able to make the best of the opportunities they have. So education becomes more important in these terms than in the past.
Will Brehm 32:41
Well Hugh Lauder, thank you very much for joining FreshEd.
Hugh Lauder 32:44
It was a delight. I hope it was of some value to you.
The end of Human Capital Theory?