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Policies to Create and Destroy Human Capital in Europe

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  • James J. Heckman
  • Bas Jacobs

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. Policies to promote human capital formation reduce welfare state dependency among the unskilled and offset inefficiencies in human capital formation. Skill formation features strong dynamic complementarities over the life-cycle. Investments in the human capital of children have higher returns than investments in the human capital of 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 often does not meet the cost-benefit criterion. Positive returns to active labor market and training policies are doubtful. 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 redistribute resources from outsiders to insiders in labor markets, which can be both distortionary and inequitable. Actuarially fairer early retirement and pension schemes reduce the incentives to retire early and strengthen incentives for human capital investment by increasing the time-horizon over which returns to human capital are harvested.

Suggested Citation

  • James J. Heckman & Bas Jacobs, 2010. "Policies to Create and Destroy Human Capital in Europe," NBER Working Papers 15742, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15742
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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

    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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