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FEM 4204FEM 4204HUMAN CAPITAL: THEORIES HUMAN CAPITAL: THEORIES

AND PERSPECTIVESAND PERSPECTIVESZuroni Md JusohZuroni Md Jusoh

RESOURCE MGT AND CONSUMER STUDIES, RESOURCE MGT AND CONSUMER STUDIES, FACULTY OF HUMAN ECOLOGYFACULTY OF HUMAN ECOLOGY

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OUTLINEOUTLINE• Human Capital Theory*Human Capital Theory*• Household Production Theory*Household Production Theory*• Altruism Theories*Altruism Theories*

* These are all utility maximization models* These are all utility maximization models

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REFERENCESREFERENCES• Begg, D., Fischer, S., and Dornbusch, Begg, D., Fischer, S., and Dornbusch,

R. (1987) R. (1987) EconomicsEconomics, McGraw Hill, McGraw Hill• Bryant, W. K (1990) Bryant, W. K (1990) The Economic The Economic

Organization of the HouseholdOrganization of the Household, , Cambridge Univ PressCambridge Univ Press

• Rahmah Ismail (1996) Rahmah Ismail (1996) Modal Manusia Modal Manusia dan Perolehan Buruhdan Perolehan Buruh, , Dewan Bahasa Dewan Bahasa & Pustaka& Pustaka

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Human Capital TheoryHuman Capital Theory• (Inter temporal choice) utility max(Inter temporal choice) utility max• The Economists: The Economists: Schultz (1961) & Becker (1962) Schultz (1961) & Becker (1962) • The Theory:The Theory:

– Deals with individual utility maximization over timeDeals with individual utility maximization over time• Choice between Choice between currentcurrent vs. vs. futurefuture consumption consumption • I.e. if UI.e. if Ucc < U < Uff then, individual will then, individual will forego current forego current

consumptionconsumption• Note:Note: Forgone current consumption Forgone current consumption = = direct cost direct cost (e.g. (e.g.

cost of schooling) + cost of schooling) + opportunity costopportunity cost + + other non other non monetary costmonetary cost (emotional cost of leaving the family etc) of (emotional cost of leaving the family etc) of investment investment

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Human Capital Theory …Human Capital Theory …contcont

• Depending on HH time preferences, HH will put Depending on HH time preferences, HH will put aside a fraction of its current income as aside a fraction of its current income as savingsaving

• The question isThe question is – what form will the saving take? Bonds, – what form will the saving take? Bonds, stocks, buy a house or investing in oneself/family stocks, buy a house or investing in oneself/family members? members?

• The theory says:The theory says:– Human capital can be added, built and produce return Human capital can be added, built and produce return

like other types of capital (i.e. financial capital)like other types of capital (i.e. financial capital)• Consider an individual concerned only with Consider an individual concerned only with

monetary payoff to formal schoolingmonetary payoff to formal schooling– S/he will only invest in added schooling if S/he will only invest in added schooling if payoff of payoff of

added schooling ≥ payoff of the alternative investadded schooling ≥ payoff of the alternative invest (e.g. stocks, bonds, saving accounts etc) at the going (e.g. stocks, bonds, saving accounts etc) at the going market interest rate of market interest rate of rr..

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Human Capital Theory …Human Capital Theory …contcont

The return of education etc…The return of education etc…will be discussed in detail will be discussed in detail

later later

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Household Production Household Production TheoryTheory

• (Extension to the traditional utility max)(Extension to the traditional utility max)• The economist:The economist: Gary Becker Gary Becker• Here, consumer behavior is seen to be Here, consumer behavior is seen to be

similar to that of a firm (role as similar to that of a firm (role as BuyerBuyer & & SellerSeller in different market) ~ the in different market) ~ the circular circular flowflow– i.e. consumer DM is not restricted to the final i.e. consumer DM is not restricted to the final

goods market alonegoods market alone– Here, resource allocation or interaction with Here, resource allocation or interaction with

the factor market becomes part of the the factor market becomes part of the frameworkframework

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Household Production Household Production TheoryTheory

• The Theory:The Theory: – Assume:Assume: HH derives satisfaction from 3 composite HH derives satisfaction from 3 composite

gdsgds• Market gd ~ C; Home gds ~ G; Leisure time ~ LMarket gd ~ C; Home gds ~ G; Leisure time ~ L

– The utility function:The utility function: U = u (C, G, L) U = u (C, G, L)– Assume:Assume: C & G are perfect substitutes, thus U = u C & G are perfect substitutes, thus U = u

(C+G, L)(C+G, L)– Time constraint ~ T = L + M + HTime constraint ~ T = L + M + H– HH production function ~ G = g (H; X) where X is mkt HH production function ~ G = g (H; X) where X is mkt

inputs (assumed fixed) inputs (assumed fixed)

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Household Production Household Production TheoryTheory

• The market work budget constraint:The market work budget constraint:– Income = earned + unearned income Income = earned + unearned income Y = E + VY = E + V The family expenditure on mkt gds are PC, The family expenditure on mkt gds are PC,

where P is the price index. Since expenditure where P is the price index. Since expenditure exhaust income, so,exhaust income, so,PC = Y = E + VPC = Y = E + V

– But earning depend on how much time is spent But earning depend on how much time is spent on mkt work. If hourly wage rate is on mkt work. If hourly wage rate is ww, so, so• E = E = wwMM

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Household Production Household Production TheoryTheory

• Note: Note: E = E = wwM, so substituting it in the equation, M, so substituting it in the equation, PC = PC = wwMM + V + V PC = PC = w w (T-L)(T-L) + V + V – – i.e. if no HH production : T = M+L; M = T-L i.e. if no HH production : T = M+L; M = T-L , so, so

PC + PC + ww L L = = w w TT + V + V – Full Income– Full Income• Full income represent the resources available to Full income represent the resources available to

the householdthe household• When wage rate increases – time allocation When wage rate increases – time allocation

preferences will be revealed – e.g. work , HH preferences will be revealed – e.g. work , HH wrk wrk

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Theory of AltruismTheory of Altruism• In this model, a person, In this model, a person, hh, is , is

effectively altruistic towards another effectively altruistic towards another member of his family, member of his family, ww, whom may , whom may be his child, spouse etc.be his child, spouse etc.

• ““AltruisticAltruistic” means that ” means that hh’s utility ’s utility function depends positively on the function depends positively on the wellbeing of wellbeing of ww

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Theory of Altruism … Theory of Altruism … contcont

• Application:Application: Private bequest behaviors Private bequest behaviors• Parents intentionally or unintentionally Parents intentionally or unintentionally

make transfers to their descendents in make transfers to their descendents in numbers of ways:numbers of ways:

1.1. Biological transfers of natural talents and Biological transfers of natural talents and abilitiesabilities

2.2. Purchases of educations and other human Purchases of educations and other human capitalscapitals

3.3. GiftsGifts4.4. Bequest of tangible and financial propertiesBequest of tangible and financial properties

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Theory of Altruism … Theory of Altruism … contcont

• In altruistic model, In altruistic model, – a parent HH cares not only about its a parent HH cares not only about its

own lifetime consumption of its own lifetime consumption of its descendentsdescendents

To be continueTo be continue

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