basketball player, an opera singer, or a movie star. In these cases, the
combination of a small and inelastic supply and a large enough demand
for the relevant kind of labour causes the market-clearing wage to be
high. Wage differentials of this kind are also equilibrium wage
differentials. Later in the chapter we have more to say about the salaries
of “superstars” and how modern communications technology has
dramatically increased their earnings in the last few decades.
- Human Capital
A machine is physical capital. It requires an investment of time and
money to create it, and once created, it yields valuable services over a
long time. In the same way, labour skills require an investment of time
and money to acquire, and once acquired, they may yield an increased
income for their owner over a long time. Since investment in labour skills
is similar to investment in physical capital, acquired skills are called
human capital. The more costly it is to acquire the skill required for a
particular job, the higher its pay must be to attract people to incur these
training expenses.
Investment in human capital is costly, and the return is usually in terms of higher future
earnings.The two main ways in which human capital is acquired are through
formal education and on-the-job training.
Formal Education