Some labor economies have criticized the labor capital theory claiming that it tries to explain all differences in wages and

Question 1

Some labor economies have criticized the labor capital theory claiming that it tries to explain all differences in wages and salaries in terms of human capital. Assess the validity or otherwise of this argument.

In simplest language human capital can be said to correspond to any stock of knowledge or characteristics the worker has, either acquired or innate, and which contributes to his or her “productivity. According to the argument of labor economists, every observable difference in remuneration in the labor market is due to due to human capital. That means that if for instance one teacher or lecturer is paid a smaller salary than another lecturer, then the low paid lecturer has lower skills which are not measured by the years of schooling.

The labor economies are right in criticizing the labor capital theory because labor economists presume that all pay differences are related to skills, which is not true because there are many notable exceptions.

(a) The first exception is discrimination based on taste whereby employers pay a low wage to a worker because of the worker’s gender, race or other forms of prejudice. These have also been referred to as gender and nativity wage differentials, discrimination in the work place, and socioeconomic status. An example is a white man working in Kenya is likely to earn more than other Kenyans working in the same organization. The difference in the wages can arise due to the connections one has at the work place or ethnicity. There could also be immeasurable variables such as personal character or connections with insiders for instance via family or fraternity. Wages can therefore be higher for employees on aspects other than human capital.

(b) Differences in compensation can also arise due to labor market imperfections. This is where workers with the same human capital are paid different wages because the jobs they do differ in terms of their productivity and pay, and one of the workers was lucky to get the high productivity job and the other got the low productive one.

( c) difference in wages also arises due to compensating differentials whereby a worker is pad less money because he/she receives part of the compensation in terms of other working conditions which might not be easy to observe for instance better amenities.

Labor market theorists do not take care of market imperfections such as non-competing groups and labor-market segmentation. In segmented labor markets, the “return on human capital” differs between comparably skilled labor-market groups or segments. An example of this is discrimination against minority or female employees.

In conclusion Theories of human capital view human beings as means to increased income and wealth rather than as ends. These theories are concerned with human beings as inputs to increasing production. One can earn a salary different from others depending on many other factors although they are working in the same organization. The term human capital is also considered inappropriate and inhumane, as individuals would be degraded and their abilities classified according to economically relevant quantities.