Human Capital and Public Policy

Abstract

This article surveys the theoretical and empirical literature on investment in human capital and the effect of public policies. Empirical literature shows that education carries considerable amount of risk and only 9 per cent of the variability of the returns to college education are forecastable at the time of making college choices. However, uncertain future returns in human capital investment may increase or decrease investment in skill formation. Individuals may prefer to stay in school longer with increasing risk in future earnings. As schooling and training are the two essential elements of investment in human capital, public policies become important for the incentive to acquire human capital. The link between public policies manifested in terms of taxation and subsidies generate interesting outcomes. While in some cases there may be little or no impact of taxation or subsidies on human capital formation, these may more often hamper accumulation of skill. This article discusses these and several other dimensions associated with human capital formation in developing economies. JEL Classification: H21, H23, H24, J24, J38.