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Q & A

Wednesday, April 1, 2009
How are investment in human capital and personal income in the United States related?

There is a strong positive correlation between investment in human capital through education and expected earnings. The benefits of education and experience really show up over the long term. (See chart.)

Over time, what has happened to the percentage of people in the United States who have finished college and per capita income?

As the percentage of Americans who finish college has increased over time, per capita income has also increased. In 1950, per capita income was estimated at little more than $10,000, and the percentage of the population with college degrees was around 7 percent. In 2004, per capita income was estimated at slightly less than $35,000 and the percentage of the population with college degrees was around 28 percent. States that have a higher percentage of the population that are college graduates also have a higher per capita income.


In today’s economy, how does investment in physical capital and investment in human capital compare in the United States?

Although physical capital once drove the U.S. economy, investment in human capital now takes precedence. In the early days of the country’s economic development, most work required muscle power. Today, there is a shift toward more sophisticated jobs that require more brains than brawn. Services now dominate the U.S. workplace and provide 80 percent of the nation’s jobs. Although some of the work requires only basic skills, many jobs require handling complex tasks which demands more investment in human capital.


What is the relationship between level of education and unemployment?

Americans with more education are less likely to be unemployed. This is especially true in the 25-34 age range of the work force where the jobless rate can be three or four times higher for the high school dropout than the college graduate. Although a substantial difference remains in older age groups, it is not as dramatic because work experience improves employment prospects.


How does having a relatively free economic environment relate to investment in human capital and GDP per capita?

Investment in human capital can’t achieve its full economic potential without labor market freedom. When companies and workers are free to make job decisions, scarce labor resources are channeled to their best uses, making the economy more productive and allowing investment in human capital to yield greater dividends. This can be validated by a comparison of countries through the Index of Economic Freedom. In reference to GDP per capita and years of school completed, more-free economies have a higher GDP per capita when compared to years of school completed than less-free economies.


What is the Index of Economic Freedom?

The Wall Street Journal and The Heritage Foundation track levels of economic freedom using the Index of Economic Freedom. The Index ranks the world economies based on 10 categories: business freedom, fiscal freedom, monetary freedom, trade freedom, government size, investment freedom, financial freedom, property rights, labor freedom and freedom from corruption. The higher the index score, the higher the degree of economic freedom in a country.

SOURCE: 2004 Annual Report, Federal Reserve Bank of Dallas, pp. 7-19