Friday, 27 November 2015

Human capital and social mobility

In general, capitalism is based on meritocracy. For instance, paternal earnings had the least effect on sons’ earnings in Canada, Norway, Finland, and Denmark, where less than 20 percent of income advantages were passed onto children (Isaacs, 2008). However, there are concerns that this does not apply across the board (e.g. the USA, UK and Italy have low mobility) and that mobility is mostly determined by the parents education.

Yet, there are also concerns that under capitalism markets do not work well for long term human capital investment.

For instance, some professionals see their investment in training destroyed because of supply and demand mismatches. This happens to many graduates who end up in low skill jobs. This mismatch between qualifications and job opportunities may be specific to some markets or may be the result of cyclical trends, but it is not a feature of capitalism.

Markets with a permanent excess supply of labor are usually found in industries with winner-takes-all business models. For instance, in the entertainment industry there are only a limited number of slots for handsomely paid super-stars, which act as a magnet to the many candidates to win the super-star lottery. The consequence is that most of the runners-up end up working in bars or McDonald’s, thus losing the investment they made in art school.

Changes in cyclical trends are also significant and can be illustrated by teachers. The demand for teachers depends on population growth with demographic cycles usually long but, occasionally, suddenly shifted by migratory flows or changes in enrollment policies that cause large mismatches in demand that cannot be corrected quickly.

For instance, the baby boom of the 1950s and the economic growth in the 1960s generated an impressive growth in the population of schooling age and enrollment rates. However, the subsequent decline in fertility rates had the opposite effect. It had a dramatic effect on the employment and earnings of teachers who, starting from a position of high social status, ended up unemployed or in a low-status low-wage sector. That is, their investment with a view to social climbing through education had a negative return.

Although the return on education depends on many factors, including parenting, it is obvious that the laws of supply and demand influence the income and status of the various professions which are subject to rotation in status. This flexibility is required by competitive markets but it affects differently the various professions.

For example, if someone trains to be a sales representative in one industry and that industry shrinks he or she can still move to another industry because his qualifications are not specific to that industry. That is not the case in highly specialized jobs. These have a higher risk of becoming obsolete or requiring extremely high costs of retraining.

However, while free competition may increase the risk of human capital obsolescence it also increases the opportunities for more investment in human capital, and the later exceeds by far the first. Moreover, the impact of free competition on human capital is probably less than that of technology and demography.

In conclusion, capitalism may be disruptive in relation to returns on human capital and social mobility, but it is not a major cause on the inequality of individual returns. On the contrary, it is a driving force in the promotion of equality of opportunities.

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