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Volume :8 Issue : 32 1982      Add To Cart                                                                    Download


Auther : By: Dr. Suliman Al-Qodsy

Investment in Human Capital is a relatively recent field in the main body of economics. It has succeeded in analyzing human investment decisions within the concept of the consumer’s “Free Choice”. The objective of the model aims at relating a person’s labour earnings to his attributes of human capital – the main variables being education and experience. Chiswick and Mincer were among the first economists to formulate the so-called Human Capital Approach to earnings. They have shown that a simple human capital model leads to a precisely specified equation for analyzing the logarithmic variance of earnings. Both formal education and training are positively correlated with an individual’s earnings. However, education and experience may be negatively correlated with one another in cross-section study as more-educated people tend to enter the labor-market an older age than less-educated people. The model that can be readily used to analyze inequality in labour markets is as follows:

Ln(Ei) = +Si + BXi + OSiXi –Ei

Where E = earnings, S = Schooling

Xi = experience and Ei = error term


Taking the variances of both sides yields:

O² (LnE) = O² + O² (S) + B² O² (Xi)

E+2 Cov(SX) + O² (e)


This formula makes the relative variance of earnings a function of the variances and co-variances among schooling and experience.

Using cross-section data, the human capital investment model was applied to Kuwait’s labor market. The results show that the model can explain about 25 per cent of the variations of male earnings in Kuwait. Formal education seems to explain more variations in earning differences than experience. However, the relatively low explanatory power of the model implies that variables other than education and experience are important determinants of earnings. The variance of the logarithm of earnings is small, about 26 percent, pointing to a modest inequality pattern among male Kuwaitis. And as expected the marginal productivity of investment in human capital declines as the number of years of schooling increases.

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Dec 26, 2021

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