Extract from How the Human Capital Model Explains Why the Gender Wage Gap Narrowed by Solomon W. Polachek

 Linking Expected Lifetime Work and Wages: The Human Capital Model The human capital model links expected lifetime labor force participation to one’s incentive to acquire marketable training. In turn, this training, acquired in school and on the job, determines earnings potential. Thus expected lifetime work history is the most important motivating ingredient in one’s ability to eventually achieve high earnings. 4 The process works as follows: There are costs and benefits to human capital acquisition. The costs are direct (such as tuition and learning manuals) and indirect (mostly foregone wages during training). The benefits are mostly increased lifetime earnings. However, there are some other more intangible benefits like how one conducts him/herself in everyday life, as well as social benefits such as reduced crime, lower unemployment, and greater economic growth. 6 The more years one works the greater the opportunity to reap the benefits of higher earnings. So, for example, were one never to work, marketable human capital benefits would be zero, independent of how many professional or Ph.D. degrees one acquires. In a similar vane, dropping out of the labor force to bear and raise children reduces lifetime work years, which in turn decreases the potential rewards from human capital. These reward reductions decrease the value of human capital investment. In contrast, those who expect to work long hours, and those who foresee the greatest number of years at work have the highest expected returns. Thus, all else constant, the less one’s lifetime labor force participation, the lower the benefits to investment, and hence the smaller one’s incentives to invest in training. Since, on average, women work fewer hours throughout their lives, one expects women to purchase less human capital investments than men. Lower human capital investments relative to men, translate to lower per hour relative women’s wages. Hence the malefemale wage gap widens. On the other hand, as women’s lifetime labor force participation rises, and as men’s lifetime labor force participation falls, one should expect the male-female wage gap to narrow. Indeed, as I’ll show, this is what the data indicate. But first, I mention a couple other implications regarding the shape of the earnings profile. First, as one gets older, earnings rise each year. The rate at which earnings increase from year to year varies with one’s age. Young workers, below 35, experience 6 Some of these intangible benefits are addressed in Robert Michael (1973), “Education in Non-market Production,” Journal of Political Economy, 81:306-327; and Dora Polachek and Solomon Polachek (1989), “An Indirect Test of children’s Influence on Efficiencies in Parental Consumer Behavior” The Journal of Consumer Affairs, 23(1): 91-110. Such social and familial benefits might be one reason why some cultures value more highly educated wives even though these cultures advocate wives being in the home rather than the workplace. I don’t deal with these social benefits in this paper. 5 the most rapid per year earnings increases. Workers in their 50s find earnings growth to be relatively meager. Their earnings rise hardly at all. Here again, the human capital model explains why earnings growth varies over the lifecycle. Early in life (below age 35), individuals have a whole work-life ahead. With so many years to work, investments in training payoff big-time, since returns are reaped for a long time. Later in life, the “present value” of training is smaller since there are fewer work years to accumulate the returns.7 Accordingly, older individuals typically purchase less training, and concomitantly earnings rise less quickly. Second, a worker with anticipated intermittent labor force participation follows a lifecycle-training pattern different than the typical worker. Rather than begin with large, but diminishing amounts of training, investments are initially small. They then rise moderately until the time one permanently reenters the workforce, when child rearing is completed. As a result, women’s earnings need not exhibit the usual concave ageearnings profiles characteristic of men, given these human capital investment patterns. For this reason, women’s lifecycle earnings profiles are flatter than men’s. Further, women’s earnings are often non-monotonic (i.e., exhibit a midlife dip), depending on the pattern of intermittent work behavior.8 Although rarely emphasized in the literature, these patterns strongly emerge in empirical studies. 7 The present value of a human capital investment such as training is the discounted value of the increased wages one receives over the remainder of one’s work-life. In mathematical terms, this is Â= + D R i i r Y 1 (1 ) where R is the number of years one expects to stay on the job reaping returns from the investment, DY is the extra earnings the human capital yields, and r is the discount rate. In continuous time, the present value is Ú - D R rt Ye dt 0 . The present value of any given investment diminis hes as one gets older because R is smaller for older individuals. 8 See Solomon Polachek (1975) “Differences in Expected Post-School Investment as a Determinant of Market Wage Differentials,” International Economic Review, 16:205-29; as well as Yoram Weiss and Reuben Gronau (1981), “Expected Interruptions in Labor Force Participation and Sex-Related Differences in Earnings Growth,” Review of Economic Studies, 48(4):607-19 for rigorous explanations of human capital investment patterns in the presence of intermittent labor force participation. For a non-technical version, see S. Polachek, “Discontinuous Labor Force Participation and Its Effects on Women’s Earnings, in C. 6 Given the importance of lifetime labor force participation, the obvious question is why do women have different lifetime work patterns than men?