Harvard Educational Review
  1. Inequality in America

    What Role for Human Capital Policies?

    By Benjamin M. Friedman

    Cambridge, MA: MIT Press, 2004. 370 pp. $40.00.

    Inequality in America: What Role for Human Capital Policies? is the product of the third Alvin Hansen Symposium on Public Policy held at Harvard University in April 2002. Edited and introduced by Benjamin M. Friedman, a professor of political science at Harvard University, this book is structured in a way that preserves the character of the symposium. The first two chapters are separate arguments by Alan B. Krueger, a professor of economics and public affairs at Princeton University, and James J. Heckman, the Nobel Laureate for Economics in 2000, who wrote with his then-doctoral student Pedro Carneiro. The third chapter consists of comments by five scholars: George J. Borjas, a professor of public policy at Harvard University; Eric Hanushek, an economist at the Hoover Institution; Lawrence F. Katz, a professor of economics at Harvard University; Lisa M. Lynch, a professor of international economic affairs at Tufts University; and Lawrence H. Summers, a professor of economics and president of Harvard University.
    Subsequent chapters include Krueger’s and Carneiro and Heckman’s responses and rejoinders to each other and to the five discussants. This structure preserves the heated debate at the symposium. Participants addressed a question of great importance: How can widening economic inequality be improved through human capital policies such as education and training? As Friedman states in the introduction, there was a movement toward equality during the first few decades after World War II, but unfortunately this movement has been reversed since the mid-1970s. The increasing pay differential associated with educational level and skills can explain much of this widening gap. Therefore, policymaking in the fields of education and labor training, especially the question of where to invest scarce resources to maximize their effectiveness in improving human capital, plays a significant role in addressing the issue of increasing inequality in America.

    To Krueger, allocating more resources to the education and training of those from low-income families is an effective way to reduce inequality. His argument for making this policy recommendation is that credit constraint is the largest barrier to achieving equal educational opportunity for students from low-income families because they tend to use a higher discount rate when making educational decisions. Furthermore, he cites extensive evidence from preschool, elementary, and secondary schools, as well as second-chance education and training, to prove that returns to education and training are at least as big for those at the bottom of the income distribution as they are for those at the top. In fact, after examining the empirical evidence Krueger concludes that “the real rate of return from investment in various education and training programs for the disadvantaged is six to 11 percent” (p. 23), which would make investing more in the education and training of the disadvantaged an effective way to reduce inequality.

    To Carneiro and Heckman, relieving the short-term credit constraint may be cost effective. However, they do not think it is likely to improve the equality of educational opportunity substantially. They argue that “long-term environmental factors crystallized in cognitive and noncognitive abilities play a major role in accounting for gaps in schooling attainment across socioeconomic groups” (p. 148). This argument shows that they differ from Krueger in two major, related aspects. First, they think that more resources should be allocated to early childhood education. The reason is that family environment plays a decisive role in shaping a child’s ability. Since a child’s ability, not credit constraint, to a great extent determines his or her college attendance, policies that can improve family environments will be more effective in improving equal opportunity to education. Second, they think that noncognitive abilities, such as perseverance, dependability, trustworthiness, and other behavioral skills, play an equally important role as cognitive abilities in a person’s success in the labor market and in schooling. Good family environments promote these noncognitive abilities while bad ones do not. The empirical evidence provided by Carneiro and Heckman is extremely rich, ranging from studies on family background factors and noncognitive skills, to studies on methods for improving school quality such as reducing class size and school choice, to studies on the effectiveness of specific programs. The empirical evidence examined by both sides overlaps to a certain degree. However, they draw different conclusions because of their different foci and the different weight they give to the studies.

    In the remaining chapters, the five other contributors offer their perspectives. The item on the top of Borjas’s agenda for human capital policies is immigration, because he believes that the large-scale immigration of low-skilled workers in recent years has had a negative impact on human capital in the United States, thus making it difficult to pursue policies, like those advocated by Krueger and Carneiro and Heckman, which would help equalize human capital. For Hanushek, Heckman’s argument is more convincing because it “looks more like an education and development program for improving the human capital stock than does Krueger’s” (p. 267). Katz complements the arguments nicely by talking about human capital policy from the perspectives of crime and residential segregation. Lynch uses the analogy of trying to change the temperature of bath water to illustrate the difference between the two sides: Krueger focuses on fixing the existing stock of human capital, while Heckman focuses on the inflow. Summers raises issues from the perspective of public finance, including whether rates of return should be used to judge investments and how policies concerning public expenditure can distort taxation. In the following responses and rejoinder, both Heckman and Krueger provide their responses to the five commentators’ views and to the other side. It is interesting that while all the commentators clearly outline the commonality of the arguments, both sides seem to hope for more focus on their differences.

    This book provides a rich literature review on the policies and programs aiming to improve the quality of labor through education and training. Because of the book’s interactive structure, the issues addressed are analyzed in a critical and profound way. As a good example of the intersection of education and economics, this book is suitable for educators who have an economics focus and for economists who are concerned with education and training.

    B. C.
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    NCLB Meets School Realities
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    Inequality in America
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