Mission drift 4.1: The scourge of human capital theory: Insufficient validity

Note: This is first in a sub-series of the mission-drift series, pointing out how human capital theory has contributed to mission drift, pushing universities toward pseudo-vocationalism

Stakeholders who are powerful yet remote from the contemporary classroom—governments, the shadow research community that advises policy-makers, and  administrators—tend  to tend to think in terms of the rational-choice logic that is central to the discipline of economics, which is often thought of more as an art than a science. Most influential in education economics is human capital theory, which hypothesizes that individual and societal investments in education yield economic returns for those individuals and societies. In the case of the university-level education, these stakeholders invariably point to studies that show that university graduates have lower unemployment rates and higher salaries than those with other types of education.

Although this evidence does provide some support for human capital theory, as we took great pains to emphasize in ITB, there are competing explanations for why university graduates do better than those with other types of education. In particular, some university credentials have a ‘positional’ quality implicated in status competitions for jobs that employers use in selecting among prospective employees. This is especially the case for general, liberal-arts degrees that in their traditional forms represent more abstract forms of skills (like critical thinking) but do not generally have direct workplace applications.

For decades governments have developed educational policies based on human capital theory, but as it turns out, the theory works much better in explaining outcomes for applied and professional degrees that are designed to increase the concrete skills sought by employers. Because many of those in these three groups of stakeholders do not recognize this distinction between concrete and abstract skills, they keep advocating the general university education as if it had the same marketability as the applied education. It is not that human capital theory is not still useful, but rather that its acclaim far exceeds its utility to the point where the policies based on it are actually creating a multitude of problems, sometimes making it more difficult for many people to integrate into the workplace.

University graduates experience a bottleneck on their way to the job market that cannot be explained by advocates of human capital theory who promote the notion that ‘more education is better’ regardless of the type or content of that education. This bottleneck involves the high probability of underemployment, especially those graduates of liberal arts and general programs, which reaches 50 percent within two year of graduation.[i]

One way of understanding this underemployment or ‘over-qualification’ is as follows:

If the proficiencies ostensibly represented by any post-secondary credential constituted marketable skills to the extent claimed by human capital theorists, even liberal-arts graduates would not face a bottleneck in matching their ‘skills’ to jobs. Even if existing jobs that needed their skills were saturated, they would find or create more lucrative employment outcomes, including the creation of their own productive enterprises. However, only a small number of liberal arts graduates create their own employment outside of existing institutional contexts like government, schools, and businesses. Moreover, if marketability closely adhered to any type of education, years of schooling would predict earnings and outcomes independent of whether a credential is attained, but this appears not to be the case. Instead, empirical studies find a ‘sheepskin’ or ‘signaling’ effect of credential attainment.[ii] Thus, to the extent that a university education has become a prerequisite for just about any type of white-collar job, even where the skill levels are obviously mismatched, the impact of these credentials needs to be understood sociologically rather than just economically.

We can see how this confusion arose if we look at the earliest peer-reviewed academic publications that developed the claim that human capital investments were analogues to other types of capital investments. When we do so, we find much more circumscribed designations than those that currently inform researchers and policy-makers. For example, in a 1935 article in The Quarterly Journal of Economics, J. R. Walsh argued that only investments in training for a profession would constitute ‘a capital investment made in a profit-seeking, equalizing market, in response to the same motives which lead to the creation of factories, machinery, and the like.’[iii] Walsh did not recognize general forms of education as involving this type of profit-producing investment motivation:

At the outset is to be noted the obvious fact that some education is clearly not the result of ‘rational’ profit-seeking calculations. The training children receive up to and including that in secondary school is not primarily intended to develop vocational skills. Rather it is the intent of the parents and the state to promote the education of citizens. The purpose is to provide political and cultural education in the widest sense. And although abilities which have their economic significance are developed as a part of the process of training an intelligent electorate, these abilities are by no means the preconceived object of the training. Their appearance is incidental to the major purpose.[iv]

However, it was economists like Gary Becker[v] who, in the 1960s, popularised the concept of human capital, claiming its equivalence to other types of capital investment (like buying more machinery) and thereby making it attractive to policy-makers. Although Becker cited Walsh as supporting his popularisation, Becker’s influential work constituted a departure from these earlier assumptions that applied the concept of human capital only to vocational and professional forms of education intentionally pursued for their concrete economic returns. According to earlier economists like Walsh, this would exclude most secondary educations in ‘academic’ streams, as well as liberal arts programmes at universities, both of which are now uncritically assumed to constitute forms of capital investments on par with applied streams.

More contemporary research is confirming that earlier formulations of human capital theory were more precise than current ones in limiting their predictions to the outcomes of specific forms of vocational and professional education. As David Walters recently concluded in his analysis of the skill use of post-secondary graduates in Canada, human capital theory is ‘more applicable to applied and technical programs’.[vi] In an analysis that specifically tests this theory against credentialism theory, Walters found that

there are a large number of graduates, particularly those of liberal arts programs, who are in jobs that are not related to their schooling. This finding lends support for the credentialist perspective, that there is widespread mismatching of credentials in the labour market …[vii]

Next post: Mission drift 4.2: The scourge of human capital theory: Policy-makers and their advisors

[i] See ITB and the page on underemployment on this blog.

[ii] A minor voice in education economics recognizes that certain credentials have more of a social than an economic function; e.g., Ferrer, Ana and Riddell, W. Craig (2002) ‘The Role of Credentials in the Canadian Labour Market’, Canadian Journal of Economics 35: 879-905; Johannes Hörner (2008). “signalling and screening.” The New Palgrave Dictionary of Economics, 2nd Edition.

[iii] Walsh, J. R. (1935) ‘Capital Concept Applied to Man’, The Quarterly Journal of Economics 49/2: 255-285. (p. 256).

[iv] Walsh, p. 256

[v] Becker, Gary (1964) Human Capital. Chicago: University of Chicago Press.

[vi] Walters, David (2004) ‘The Relationship Between Postsecondary Education and Skill: Comparing Credentialism with Human Capital Theory’, The Canadian Journal of Higher Education 34: 97-124. (p. 117)

[vii] Walters, p. 116