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Policies to Create and Destroy Human Capital in Europe

Author

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  • Heckman, James J.

    () (University of Chicago)

  • Jacobs, Bas

    () (Erasmus University Rotterdam)

Abstract

Trends in skill bias and greater turbulence in modern labor markets put wages and employment prospects of unskilled workers under pressure. Weak incentives to utilize and maintain skills over the life-cycle become manifest with the ageing of the population. Reinvention of human capital policies is required to avoid increasing welfare state dependency among the unskilled and to reduce inefficiencies in human capital formation. Policy makers should acknowledge strong dynamic complementarities in skill formation. Investments in the human capital of children should expand relative to investment in older workers. There is no trade-off between equity and efficiency at early ages of human development but there is a substantial trade-off at later ages. Later remediation of skill deficits acquired in early years is often ineffective. Active labor market and training policies should therefore be reformulated. Skill formation is impaired when the returns to skill formation are low due to low skill use and insufficient skill maintenance later on in life. High marginal tax rates and generous benefit systems reduce labor force participation rates and hours worked and thereby lower the utilization rate of human capital. Tax-benefit systems should be reconsidered as they increasingly redistribute resources from outsiders to insiders in labor markets which is both distortionary and inequitable. Early retirement and pension schemes should be made actuarially fairer as they entail strong incentives to retire early and human capital is thus written off too quickly.

Suggested Citation

  • Heckman, James J. & Jacobs, Bas, 2009. "Policies to Create and Destroy Human Capital in Europe," IZA Discussion Papers 4680, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp4680
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    References listed on IDEAS

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    Cited by:

    1. Cipollone, Piero & Rosolia, Alfonso, 2011. "Schooling and Youth Mortality: Learning from a Mass Military Exemption," CEPR Discussion Papers 8431, C.E.P.R. Discussion Papers.
    2. repec:eee:poleco:v:48:y:2017:i:c:p:91-103 is not listed on IDEAS
    3. Gradstein, Mark, 2010. "Social Insurance, Education, and Work Ethics," CEPR Discussion Papers 7838, C.E.P.R. Discussion Papers.
    4. Sandner, Malte, 2013. "Effects of Early Childhood Intervention on Maternal Employment, Fertility and Well-Being. Evidence from a Randomized Controlled Trial," Hannover Economic Papers (HEP) dp-516, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    5. Peter F. Lutz & Malte Sandner, 2010. "Zur Effizienz früher Hilfen: Forschungsdesign und erste Ergebnisse eines randomisierten kontrollierten Experiments," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 79(3), pages 79-97.
    6. Ralph Hippe & Luisa De Sousa Lobo Borges de Araujo & Patricia Dinis Mota da Costa, 2016. "Equity in Education in Europe," JRC Working Papers JRC104595, Joint Research Centre (Seville site).
    7. Elke Loichinger, 2015. "Labor force projections up to 2053 for 26 EU countries, by age, sex, and highest level of educational attainment," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 32(15), pages 443-486, February.
    8. World Bank, 2010. "Education, Training and Labor Market Outcomes for Youth in Indonesia," World Bank Other Operational Studies 2914, The World Bank.

    More about this item

    Keywords

    training policy; skill formation; human capital; labor supply; retirement; training; dynamic complementarity; inequality; returns to education; (non)cognitive skills; family policy; active labor market policy; tax; pension; benefit systems; welfare state;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • I2 - Health, Education, and Welfare - - Education
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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