Human capital and returns to education. review of literature

This paper examines the concept of human capital and returns to education. The theory of human capital has its origins in the work of Schultz (1961) and Denison (1962) who postulated that there is positive correlation between increasing levels of education and economic growth due to productivity enhancing effect of education. Better trained workers are considered to be more skilled and productive than less trained workers justifying their higher wages. The theory relates the worker’s knowledge levels to their formal schooling levels implying that higher levels of education schooling leads to higher productivity and wages. In this theory, workers acquire education to maximize the present value of lifetime earnings and the private returns are used to explain the demand for different levels of education. The theory of human capital has been used to explain income differential (Nyakundi, 2018).You and Giseung (2009) observed that; the returns of investment in education can be calculated from the earnings of the recipients of education. Psacharopoulos and Patrinos (2004) found out that the returns to schooling in developing countries are higher than in developed countries. Schultz (2004), Kingdon, Sandefur and Teal (2005), show that in general the return to an extra year of education increases with the level of education. The importance of human capital was earlier investigated by classical economists such as; Adam Smith, Ernst Engell and Karl Marx. Later the most influential work about the distribution of earnings was developed by Gary Becker (1962). Human Capital Theory suggests that investments in education or training, like investments in physical capital, are only undertaken with expectation of returns. The popularity of estimating returns to education stems from the resulting efficiency, equity and financing implications. The comparison between investment in education and other investments can assist justify investments in education for individuals and governments (Becker, 2007). Moreover, the level or type of education’s rank order of returns as compared to alternative investment returns could assist policy makers in the education subsector to make informed, evidence based investment decisions.