Working Paper: NBER ID: w15742
Authors: 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.
Keywords: human capital; welfare dependency; labor markets; skill formation; taxation
JEL Codes: H2; H5; I2; I3; J2; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policies promoting human capital formation (J24) | reduced welfare dependency among unskilled workers (J68) |
| high marginal tax rates (H31) | lower labor force participation rates (J49) |
| generous benefit systems (H55) | lower labor force participation rates (J49) |
| early retirement schemes (J26) | reduced incentives for human capital investment (J24) |
| structure of pension systems (H55) | reduced incentives for older workers to remain in the labor market (J26) |
| investments made at younger ages (G11) | higher returns than those made later (G12) |
| early intervention (O35) | skill acquisition (J24) |