Jonathan on Human Capital and the Crisis

Jonathan has a good post up on taking human capital investment seriously even in the midst of a demand-driven crisis. Often in the blogosphere you'll hear the subject dismissed, simply because it's a long term growth issue that has no (or at least very little) relevance to our current problems.

Like Jonathan, I agree the consensus on the contribution of skills mismatch to the crisis is right. Also like Jonathan, I hope this is not going to lead people to ignore it (if for no othe reason than that I spent a lot of my time studying human capital investment issues!).

He argues that the problem isn't a skills mismatch so much as a policy mismatch:

"There is a lot of evidence that some firms can’t find qualified employees. Earlier this week, I linked to an article in the Wall Street Journal arguing that some 600,000 jobs in manufacturing were left unfilled in 2011. Here in San Diego, I was made aware of a firm, which produces machine parts, offering free classes in its trade to lure potential employees — wages are relatively high too: I heard up to $80,000, but I’m sure there’s a range (with most new employees making much less). In this kind of environment (San Diego, specifically, has an unemployment rate of 9.2-percent) these kinds of offers seem ridiculous, but it reflects on real structural problems (workers with superfluous skills).

But, these kinds of offers may not seem that attractive when you can go to a subsidized university for as cheap as $3,500 a semester (current price of attending SDSU [which four semesters ago cost ~$2,500) — UCSD is much pricier, of course, at ~$13,000 for the entire year [and, this doesn't include parking, rent, books, et cetera], and USD charges ~$40,000). Some even get it cheaper through student aid (I not only attend for free, but get aid to help pay for my cost of living in general — the benefit of being an older, financially independent student). Even where students pay through student loans, you can get a high proportion of subsidized loans. Apart from subsidies, there also seems to be a culture fixated on the benefits of higher education, and so parents (in large part also because of higher real incomes) are more willing to subsidize their children’s education (this may breed contempt for jobs requiring a heavy degree of physical labor). The result seems to be too many college students and too little people seeking alternative means of improving their own human capital, such as trade schools."

To a certain extent I agree with this. I don't think the problem is so much our investment in college education as it is our underinvestment in other alternatives.

He concludes with an important thought:

"So, when we recognize the existence of skills mismatch, we should really be wary of advocating things like "improving human capital," since the only person in a osition to know in what direction to improve human capital is the individual - anything that can distort decision making can actually worsen the skills mismatch problem (that tend to reveal themselves during bad economic times."

Again, I obviously think there is a bigger role for policy here than Jonathan does. There are plenty of credit constraints, inequality and inadequate primary and secondary school problems that constrain the opportunity to attend college or other training programs, and positive externalities associated with education to justify making public investments in human capital investment.

The key - as Jonathan points out - is that the decision making capacity needs to be at the individual level. Too often we hear targets from politicians that we need X number of scientists and engineers or Y number of college graduates. These are numbers that market signals will provide and that individuals will make decisions about based on their own abilities and aspirations. They're not numbers that can be set by politicians.

What politicians can do is structure educational institutions to give students a wide range of opportunity and choice (and the schools considerable flexibility in satisfying those needs). Then you let the market determine the allocation and investment in skill.

I think the economic questions that lead me to support public investment and Jonathan not to are somewhat different from the issues raised here. We both agree that individual choice in human capital investment is the best way to grow the human capital stock.