The Production of Human Capital and the Life Cycle of Earnings

T HE application of capital theory to decisions on individual improvement, and in particular improvement of earning capacity, has provided a framework for the understanding of many aspects of observed behavior regarding education, health, occupational choice, mobility, etc., as rational investment of present resources for the purpose of enjoying future returns. The formulation by Friedman and Kuznets (1945) and the significant development of the theory by Becker (1962, 1964) and Mincer (1958, 1962) provided a novel view of the life cycle of earnings by linking it to the time profile of investment in human capital: People make most of their investments in themselves when they are young, and to a large extent by foregoing current earnings. Observed earnings are therefore relatively low at early years, and they rise as investment declines and as returns on past investments are realized. The main reason why investment is undertaken mostly by the young is that they have a longer period over which they can re-