Skills and human capital in the labor market

In their work, "Skills and Human Capital in the Labor Market," Deming and Silliman, renowned experts in the field, present a comprehensive review of the human capital literature. They trace its development from the pioneering works of Mincer (1958), Becker (1962), and Goldin and Katz (2007) to recent task-based frameworks. The authors synthesize evidence from various empirical studies, documenting the evolution of returns to education and skills in micro-level wage data and macro-level cross-country comparisons.

A central contribution of the paper is to highlight the growing importance of "higher-order" skills - capacities such as social perceptiveness, teamwork, and complex decision-making - which are not well captured by traditional measures of human capital. Drawing on a wealth of empirical evidence, Deming and Silliman show that the labor market returns to these skills have risen markedly since 2000, even as returns to cognitive skills have plateaued or declined in some developed economies.

The authors' proposal for reconceptualizing human capital theory is not just significant but of paramount importance. It treats workers as active agents who make strategic choices about task allocation and collaboration. Building on insights from Deming (2017) and Caplin et al. (2023), they present stylized models in which higher-order skills govern workers' decisions about tasks to perform and whether to work independently or in teams. This framework generates novel predictions about how skills translate into productivity and earnings and highlights the potential for complementarities between worker abilities and organizational structures.

The implications of this work are far-reaching. By broadening the scope of human capital theory to encompass worker agency and multi-dimensional skills, Deming and Silliman open up new avenues for research on the determinants of individual earnings, the sources of firm-level productivity, and the drivers of aggregate economic growth. Their findings also raise important questions about the capacity of education and training systems to cultivate higher-order competencies. However, they also highlight the potential for targeted interventions to mitigate skill gaps and reduce inequality, offering hope for a more equitable future.

While "Skills and Human Capital in the Labor Market" offers a compelling vision for the future of human capital research, it also invites reflection on the historical evolution of skill demand and the challenges and opportunities that lie ahead. As scholars build on the insights of this work, several lines of inquiry merit further exploration:

1) How did the historical development of labor markets and production technologies influence the relative importance of cognitive versus non-cognitive skills before the 20th century? ??

2) To what extent do current educational systems and labor market institutions create barriers or incentives for developing and utilizing higher-order skills across different socioeconomic groups? ??

3) How might the continued advancement of artificial intelligence and automation technologies reshape the demand for human capital and higher-order skills in future labor markets, and what implications does this have for education and training policies? ??

References ??

Becker, G. S. (1962). Investment in human capital: A theoretical analysis. Journal of Political Economy, 70(5, Part 2), 9-49. https://doi.org/10.1086/258724

Caplin, A., Deming, D. J., Leth-Petersen, S., & Weidmann, B. (2023). Economic decision-making skill predicts income in two countries (NBER Working Paper 31674). National Bureau of Economic Research. Retrieved from: https://www.nber.org/papers/w31674

Deming, D. J. (2017). The growing importance of social skills in the labor market. The Quarterly Journal of Economics, 132(4), 1593-1640. https://doi.org/10.1093/qje/qjx022

Deming, D. J., & Silliman, M. (2024). Skills and human capital in the labor market (NBER Working Paper No. 32908). National Bureau of Economic Research. Retrieved from: https://www.nber.org/papers/w32908

Goldin, C., & Katz, L. F. (2007). The race between education and technology: The evolution of U.S. educational wage differentials, 1890 to 2005 (NBER Working Paper No. 12984). National Bureau of Economic Research. Retrieved from: https://www.nber.org/papers/w12984

Mincer, J. (1958). Investment in human capital and personal income distribution. Journal of Political Economy, 66(4), 281–302. https://doi.org/10.1086/258055