‘Human capital depreciation’ and the Pike River Mining Disaster

There are moments when a few words can open up a vista on an entire worldview.

The words shoot through the air for a few days like a rapidly fading spark on Guy Fawkes night but, every so often, and just before disappearing, they can collide with a tragedy. Then, in a flash, everything becomes clear.

Or, less spectacularly but just as breathtaking, it’s like seeing the tell-tale trail of sad droplets that are left from a hardly noticeable collision in the Cloud Chamber that is the modern media.

Whatever your preferred metaphor, what is there for the taking when certain phrases enter the daily news is a deep insight into the fundamental nature of our society and the recent path it has set upon.

That’s what’s just happened – but enough of metaphors.

The words were the result of Business New Zealand appearing to be having kittens over women having babies.

To be fair, they weren’t anxious about women popping babies out – but those potatoes still need digging. And women might forget how to dig them up while they’re off work.

To be fairer still, it’s not that women might forget, it’s just that – as Business NZ’s manager of employment policy Paul McKay explained – there’s this inevitable process of “human capital depreciation“.

What a great phrase.

So off go the words out into the big, wide ether, courtesy of Paul McKay.

McKay catapulted these words on their way when Business New Zealand put its head above the parapets at a government administration select committee hearing into MP Sue Moroney’s bill to extend the paid parental leave period from 14 (currently) to 26 weeks. Paul McKay went on to say that:

international research showed extending paid parental leave could discourage employers from hiring potential parents.

He said potential parents could include women aged anywhere from 15 to 45 and men of any age.

According to Paul McKay, then, the only people employers will want to employ in the future is (post-menopausal?) women over 45 (and girls under 15).

Good news for all those ‘third age women‘, then – their time has come (or will do if Moroney’s bill passes and manages to escape Bill English’s financial veto).

Workplaces could become very interesting in the future given that the ‘third age’ for women is “a time to gather up all the love, laughter, loss and sorrow and use that harvest of wisdom and experience to realize our dearest dreams and passions” and “is an invitation to lose your inhibitions and fears, cut loose and joyfully create the time of your life“.

More seriously, Paul McKay’s throw-away line about ‘human capital depreciation’ raises a few obvious questions, the first being ‘What is human capital?’ The second follows on its heels: ‘What is human capital depreciation?’

On the second question, Business New Zealand’s submission appears to equate it with the loss of “work skills”:

Business New Zealand told the select committee on Wednesday that research shows the longer people are off work, the more likely it is they will lose work skills.

Employment policy manager Paul Mackay says this is called human capital depreciation and having to upskill workers is a cost to employers.

Ok, so being off work makes you lose your skills and losing skills is called ‘human capital depreciation’? Well, not really (as we’ll see, you can stay in work, keep your skill level and still ‘enjoy’ human capital depreciation).

It’s a bit of a story, but Paul McKay gets it just about backwards: Parental leave is actually a very good way to minimise ‘human capital depreciation’ – at least for society as a whole; and, probably, for a parent.

Back to the first question: ‘What is human capital?‘

Gary Becker’s famous work called ‘Human Capital‘ instituted the term in economic thought, although, as he acknowledges, there were interesting forebears working on the issues:

What has been called the human capital “revolution” began about three decades ago. Its pioneers include Ted Schultz, Jacob Mincer, Milton Friedman, Sherwin Rosen, and several others associated with the University of Chicago.

(p. 15 – Second Edition)

And, as with those Chicago School economists, Becker followed the assumptions of rational choice:

My discussion follows modern economics and assumes that these investments [e.g., in human capital – education, training, etc.] are rational responses to a calculus of expected costs and benefits.

(p. 17)

The point, very simply, is that economic productivity is related to the skills, traits and abilities of people – hence, those skills, traits and abilities amount to a form of ‘capital’ (just like plant in a factory). People, therefore, make rational investment decisions about producing their own human capital as they supposedly do about any other form of capital (e.g., ‘should I build a new factory?’).

Education and training are obviously themselves productive of some human capital, but there’s another source.

From the start, Becker saw as pivotal the role of the family in the generation of ‘human capital’ during pre-adulthood (including pre-school). As he mentioned in his Nobel lecture,

The human capital perspective considers how the productivity of people in market and nonmarket situations is changed by investments in education, skills, and knowledge. The economic approach to the family interprets marriage, divorce, fertility, and relations among family members through the lens of utility-maximizing, forward-looking behavior.

Further, one of the most intellectually exhausting efforts he made was on his A Treatise on the Family:

Writing A Treatise on the Family (1981) is the most difficult sustained intellectual effort I have undertaken. The family is arguably the most fundamental and oldest of institutions: some authors trace its origin to more than 40,000 years ago (Soffer 1990). The Treatise tries to analyze not only modern Western families but those in other cultures and changes in family structure during the past several centuries.

That’s a big project. Why did he bother?

Well, one thing such a treatise enables is the extension of economic analysis, sometimes even into areas previously reserved for other social scientists:

The rational choice analysis of family behavior builds on maximizing behavior, investments in human capital, the allocation of time, and discrimination against women and other groups.

It is exactly the same basic logic that has been used by evolutionary theorists and, in particular, evolutionary psychologists to analyse the same kinds of social phenomena. The strangely disturbing feeling that many people get when they hear scientific claims such as that infanticide can be an ‘evolutionarily stable strategy’ is the same as hearing from economists like Becker that:

If children are expected to help out in old age-perhaps because of guilt or related motivations-even parents who are not very loving would invest more in the children’s human capital and save less to provide for their old age.

Despite Becker’s view from the start that human capital is also about productivity in non-market sectors such as the family, interest on the effect of the family on the production of human capital is almost always focused on whether or not productive marketable skills are inculcated in children (e.g., by which parents could get their children earning enough to support the parents in their old age).

But, in the Preface to the 2nd edition of the book (published in 1973), Becker said that “[a]lthough important studies of the effects of human capital in the market sector can be expected, I anticipate that the excitement will be generated by its effects in the non-market sector” particularly in areas like fertility, health and the “productivity of marriage“.

This move into ‘human capital’ as it relates to the ‘non-market sector’ combined with a focus on what happens in families brings back to the surface a tension at the heart of economics – that between production and reproduction.

In economics the standard terminology is production and consumption. But, as any biologist will tell you, consumption – to the extent that it is adaptive – is ultimately about reproduction. ‘Reproduction’ need not simply apply to having offspring – it includes, for example, ‘re-producing’ individual organisms (e.g., people) on a daily basis. We eat, largely, so that our continued biological existence is re-produced over time.

And it’s not just our biology that gets reproduced. We also, in the same sense, reproduce our habits, pleasures, routines, values, family life, neighbourhoods, clubs, organisations, communities, societies and our cultures.

The ‘tension’ I mentioned between production and reproduction comes down to this: It’s possible to produce ‘things’ – lots of ‘things’ –  without reproducing the particular forms and organisation of capital used to produce it.

Environmentalists are familiar with this idea: We depend on nature for all sorts of ‘services’ but it’s perfectly possible to employ those services to produce things that do not reproduce those services.

But it also can happen in the personal and social worlds.

At a personal level good novelists and songwriters know all about the same process. We can, for example, organise our ‘human capital’ (our capacities, ‘talents’, education) to produce things such as personal wealth, upward social mobility and fame but then find that, in the process, we have failed to reproduce those parts of our selves – or our personal relationships – that we valued. We change, sometimes radically, in the ‘production process’.

A society can also employ ‘capital’ (human, physical, financial and – as we’re about to see – social capital) to produce an economy that fails to reproduce the forms of ‘capital’ that produced it in the first place – and sustained it – such as strong, complex networks between people, trust, cooperation and hard work.

It may in fact be that producing one type of capital results in the ‘mining’ of (i.e., failure to reproduce) other forms of capital.

Extending the notion of ‘capital’ even beyond ‘human capital’, Robert Putnam has explored the idea of ‘social capital‘. He provides the following simple definition:

The central idea of social capital, in my view, is that networks and the associated norms of reciprocity have value. They have value for the people who are in them, and they have, at least in some instances, demonstrable externalities, so that there are both public and private faces of social capital.

Famously, he found that just about every which way you look at it, social capital – roughly, the interconnections between people –  declined in the United States in the last quarter of the 20th century after having steadily increased prior to that. ‘Social capital’ – the value inherent in “networks and the associated norms of reciprocity” – was being undermined.

That link provides a fascinating and easy to read explanation of what social capital is, the ways in which Putnam has tried to measure it and its consequences. Here’s a sample:

Someone said earlier in the conference that it is reasonable to think that social capital and institutional enforcement might be in some sense alternative ways of providing social order. Social capital does facilitate informal contract enforcement – the logic of that derives from the basic theory of social capital, that is game theory: if I have dense ties and networks of reciprocity with other people then I don’t actually have to have a contract with my neighbour; both he and I are going to rake the leaves. We just do it without a contract and I don’t sue him if he doesn’t rake his leaves. Thus, if social capital is declining in the United States, that might have implications for other forms of contract enforcement. So I thought I would look at the relative share of lawyering in the American economy as a whole and how this fraction has changed through time. In 1900, there were 41 lawyers per every 10,000 employees in the United States. In 1970, there were 39. This was a little known Putnam’s constant: historically there were about 40 lawyers, plus or minus one, for every 10,000 employees in America. This number was rock-steady over the first seventy years of this century. And then this number started to increase, just as trust and social capital started to decline, so that by now lawyers’ share in the workforce has more than doubled.

Get the picture? Norms of reciprocity – the building block of community – goes down while contractual relations between people go up. Put another way, common decency decreases and gets replaced with the economic and legal technology of market and contractual relations. Responsibility for decency gets devolved to the institutions of the economy and the law.

Great.

In reality, of course, the various forms of capital – physical, human and social – are intimately interconnected. Production of one form of capital (e.g., human capital) can affect the production of another form (e.g., physical capital).

The effect can be positive or negative. The production of social capital amongst a gang, for example, can lead to the destruction of physical capital (e.g., tagging, breaking in to parked cars, etc.).

Less obviously, production of physical or financial capital can destroy human and social capital – especially as they relate to the non-market sector. As economists might put it – though I’m not aware that they have done so – there’s a trade-off between the relative production (which is to say, reproduction) of different forms of capital. To get more of one form you have to sacrifice (re)production of another.

Which brings us back to parental leave and the supposed ‘depreciation of human capital’ it causes – according to Business New Zealand.

‘Human capital depreciation’ is measured and conceputalised in an interesting way. In fact, its value is measured – by economists – in the same way that just about everything else is valued: through its market value over time.

In other words, as Swiss researcher Sylvain Weber recently put it, human capital depreciation is “roughly defined as the decrease of a worker’s market value” (you need to download the linked article to see the quotation – on page 2).

So it’s not that a worker’s skills have necessarily deteriorated through lack of practice – demand for them may simply have changed. This is an important point, and one that Becker was on to from the start. Think about it – what skills are most likely to have rapid rates of reduction in their demand?

Here’s a clue from Becker:

One of the most influential theoretical concepts in human capital analysis is the distinction between general and specific training or knowledge (see Becker 1962; Oi 1962). By definition, firm-specific knowledge is useful only in the firms providing it, whereas general knowledge is useful also in other firms.

It turns out – at least from Weber’s Swiss study linked to above – that different types of education and training span this general versus specific distinction (Switzerland’s education system apparently makes this educational type distinction relatively easy to follow):

Following Becker’s (1964) terminology, human capital acquired through vocational studies can be considered as relatively specific, and that obtained through academic studies as more general. Hence, using Swiss data allows to test whether workers with similar education length but different education type suffer different rates of human capital depreciation.

Our empirical estimates show that human capital depreciation is significantly related to skills’ type, and not only to education length. Workers with vocational training suffer a faster depreciation than those with an academic background. Hence, academic studies (providing general skills) better protect workers against depreciation than vocational studies (providing specific skills).

Here’s part of what Weber found:

If you want to know what that graph means, compare the blue and green lines to the red and orange ones. The blue and green are the lines for specific vocational education, the red and orange for general ‘academic’ education.

The red and orange lines are steeper. What that means is that ‘human capital depreciation’ is slower for them. In fact, on average, someone in Switzerland who just went to high school (red line) will, by the time they are almost 50, be earning more than someone who in their youth slogged on to get a qualification at an applied university (green line).

As Weber concludes,

General skills protect workers more effectively against depreciation than specific skills. The depreciation rates we obtain are 0.7-0.8% for general education and 1.0% for specific education.

…

The experience-earnings profiles resulting from our estimations are steep for workers with general education and relatively flat for those with specific education.

It turns out, then, that ‘human capital depreciation’ is slower – unsurprisingly – with more generic skills, knowledge and personal capacities. It’s faster with ‘firm-specific’ skills.

No guesses as to the depreciation of which skills the businesses who make up ‘Business New Zealand’ are worried about.

Remember, too, that Becker wasn’t just interested in the ‘market sector’; he thought the most interesting part of ideas like human capital was how they allowed ‘The economic way of looking at behavior‘ to branch out into the ‘non-market sector’.

That is, human capital – and its depreciation – is not just about what is productive in the marketplace. It’s about what produces the things that people want, and prefer, in all areas of life – in their family, in their neighbourhood, in their sports club, in their society.

And what do most people want for their children? Well, let’s be generous – most people want to give their children the best start in life they can. They want to equip them with just the types of ‘general’ capital that will serve them best and longest – the type of human capital that will be most resistant to ‘depreciation’ in life.

I hope it’s obvious what I’m talking about.

While each parent may have a slightly different list of ‘must have’ forms of human capital for their children, there’ll be plenty in common.

They’ll probably want their children to get on with others; be cooperative but not a push-over; have appropriate doses of creativity and spontaneity as well as self-discipline and control; be able to persevere toward a goal but know when, and how, to relax and enjoy themselves; be generous but not a mug; be able to provide for themselves and, if they choose, provide for and raise their own family one day, etc., etc..

And, of course, every parent’s hope – that they’ll be able to be happy, whatever that might mean for them and whatever skills that might require.

These forms of ‘human capital’ are about as general as human capital gets. And, as so many pieces of folk wisdom testify, they are also the least prone to ‘depreciation’, if prone at all. They serve us all well.

In fact, they serve us so well that, as we’ll see, they also help generate ‘social capital’ – networks of interaction and associated norms of reciprocity. It’s called being human, and the path toward it starts at conception.

Enough is now known about the importance of the first few years of life in affecting the development of just these vital forms of human capital to hazard a guess that their development depends crucially on a stable, warm early relationship with one or more adult caregivers.

Not only is it ‘known’ it has also recently entered public consciousness in its neurological guise. Every man and his dog – well, in the circles I move in – pontificates on how even ‘adolescent brains aren’t fully formed, you know?’

And, the public are – roughly – right to the point where neurodevelopmental biologist Eric Keverne can conclude the following in a discussion of how the development of the brain affects later adult wellbeing (pp. 1354-1355):

Mother and infant behaviour have evolved as a unit. While the mother’s brain has been maternalized by the hormones of pregnancy generated by the foetus, the infant’s developing brain requires social stimulation from a mother committed to providing the emotional rewards of warmth and suckling. Not only do infants have to learn to sit, stand and eventually walk and talk, but they also have to learn social rules and emotional control. It is clear that the process of infant socialization benefits from this close relationship, but whether this occurs during a critical period in brain development is open to question. We know, for example, that the ability to learn language arises from a synergy between early brain development and language experience and is seriously compromised when language is not experienced early in life (Mayberry et al. 2002). It is, therefore, probably safer to think of this whole early developmental period as critical, but modifiable while the brain remains in a plastic state. The synergy between early brain development and the learning of social rules is also likely to be compromised when the developing infant–mother relationship is compromised early in life. Certainly, mother–infant separations in monkeys are known to have long-term consequences (Hinde et al. 1978) and extreme consequences for infant abuse when infants are separated from their mother and reared with peers (Harlow & Harlow 1965; Kraemer & Ebhert 1991).

He then argues that,

Humans tend to worry about the uterine environment and toxic agents or drugs, which may damage the fingers and toes of babies, but perhaps we should pay more attention to the post- partum period when the social environment exercises its effects on the developing brain and lays down the foundations for future well-being.

The “foundations for future well-being“? That reminds me – aren’t happy workers also meant to be productive workers?

If you really want to get into this research a good place to start is this UK government report by Keverne – and, wouldn’t you know it, it introduces yet another form of capital, ‘mental capital’. In it Keverne explains that,

The post-natal period is particularly sensitive to life’s experiences which can induce changes in brain development and behavioural phenotype [i.e., how we act]. Evidence from both human and animal studies demonstrates that aversive events during this period can have long-term effects on behaviour and physiology. The pioneering studies of Harlow and Harlow (1973) on maternal deprivation in monkeys revealed the importance of mother- infant interactions in normal behavioural development. With the long-term absence of mother, infant monkeys become behaviourally inhibited and more responsive to stress. More notable is the finding that, as adults, they are both socially and maternally incompetent, neglecting and abusing their own infants. Although maternal competence improves with successive births, the abusive behaviour continues (Ruppenthal et al., 1976).

As I said, it’s important to notice that these forms of ‘human capital’ emphasised by this literature are also inherently social forms of capital. They are the starting point of the social networks and connections that Putnam (above) describes as providing all those ‘externalities’ for ‘third parties’ (i.e., everyone else).

They are also the starting point for future wellbeing – and whatever we might mean by that word it has something to do with a thoroughly ‘productive’ (as opposed to ‘destructive’) human life.

Get prepared for a long quotation from Putnam – it’s worth reading:

The relationship between educational performance and social capital is much stronger, two orders of magnitude stronger than, for example – again controlling for everything else – spending on schools or teacher/pupil ratios or any of the obvious things that are more usually thought to increase educational performance. Figure 7.2 shows a composite measure of child welfare (it includes teen pregnancy, infant mortality and a variety of other measures of how well kids do) and again there is a very strong relationship showing that, in general, the welfare of children is higher where social capital is higher. Figure 7.3 shows that states where children watch less TV have higher levels of social capital, a relationship I study in much more detail in my book.

Crime is strongly negatively predicted by social capital; this is true at the state level, but it is also true at the community and neighbourhood levels. Once again the strongest predictor of the murder rate is a low level of social capital. It is stronger than poverty; it is stronger than other plausible measures. Figure 7.4 shows that murder rates are lower in states where social capital is higher, and Figure 7.5 shows that people are generally less pugnacious where social capital is high.

As Michael Woolcock and other authors have pointed out, there is very strong evidence of powerful health effects of social connectedness. The evidence is strong not only in American states, but also in Finland, Japan, and other countries. Controlling for your blood chemistry, age, gender, whether or not you jog, and for all other risk factors, your chance of dying over the course of the next year are cut in half by joining one group, and cut to a quarter by joining two groups. This is not cheating; these are prospective studies. It is not that people who are healthy become joiners, it is clear from the studies that the arrow runs in the other direction, from joining to health. These are big effects, as can been seen in Figure 7.6. Once again, these same results are confirmed by a multitude of individual-level, over-time studies.

Figure 7.7 shows that interstate variance in the percentage of tax evasion, as measured by the IRS, is strongly related to differences in social capital at the state level. No other variable does as well at explaining why states differ in tax evasion. In other words, where people are connected by dense networks of engagement and reciprocity, they are more likely to comply with the law, very probably because they are more confident that others will, too, so they will not be “suckers” in this dilemma of collective action. Figure 7.8 shows that states where people are more connected with each other are also marked by greater tolerance.

Figures 7.9 and 7.10 show that economic inequality and civic inequality are less in states with higher values of the social capital index. Here the causal arrows are likely to run in both directions, with citizens in high social capital states likely to do more to reduce inequalities, and inequalities themselves likely to be socially divisive.

Finally, I can add some preliminary new evidence to connect social capital to self- assessments of individual welfare. One of the important contributions of this conference has been to highlight the importance of considering evidence at the individual as well as the community level. Here is another example. Using a combination of the DDB replies to four questions asking individuals for a self-assessment of their own happiness, I have discovered that happiness increases with both their own and their state’s measure of social capital. By contrast, an individual’s measure of happiness rises if his or her income is higher but falls if the average state income is higher. Thus, although people value their own income more when their neighbours earn less money, people feel better off when either they or their neighbours have higher levels of social capital.

As I said earlier, physical, human and social capital are closely intertwined.

Extended parental leave is one small way that New Zealand society can invest in the most foundational forms of human (and ‘mental’) capital and the ‘human capital’ that is least likely to ‘depreciate’ over life and the most likely to generate, in turn, social capital with all its positive ‘externalities’.

Now, that might be all there is to say about ‘human capital’ and its deprecation but, sadly, there’s a much bigger picture that needs sketching.

Paul McKay’s few words shot into the media atmosphere just before another example of how our society treats – and understands – human capital exploded back into the headlines.

The Royal Commission Report on the Pike River mine tragedy was a political bombshell, as almost all commentators have pointed out.

The Minister of Labour, Kate Wilkinson, has resigned her portfolio but has still had to defend her continuation as a minister (and here).

Labour has claimed that as a result of their review of mine safety initiated in 2008 change was “on track”:

“We were on track to change the Mining Act as a result of that review,” says Labour MP Trevor Mallard. “The review was scrapped by Kate Wilkinson and that’s something that is very regrettable.”

John Key has spoken out in her defence:

Ms Wilkinson argued there was no need to review the mine inspection programme, and Mr Key backs her.

“The work was undertaken,” says Mr Key. “It started as a wider review but it was small mines, in which case, yes, the minister was right.”

But six months later, Pike exploded.

Much of the commentary has underlined how the report may have the effect of drawing a line under an era of deregulation that has continued, unabated, for over twenty years.

But deregulation is part of a much wider worldview. It’s a worldview that prioritises production of physical and financial capital over human capital and social capital.

It’s a worldview that only sees those aspects of human capital that contribute to economic production rather than those aspects that contribute to the (re)production of people, communities and society.

There’s a telling sentence in the overview ‘Snapshot’ from Volume 1 of the Royal Commission Report:

 In the drive towards coal production the directors and executive managers paid insufficient attention to health and safety and exposed the company’s workers to unacceptable risks. Mining should have stopped until the risks could be properly managed.

The “drive towards coal production” (i.e., to the production of physical capital) meant that the directors and managers “paid insufficient attention to” (i.e., did not prioritise) “health and safety” (i.e., the re-production of the men).

The Royal Commission has called for the establishment of a Crown agency to oversee health and safety in New Zealand:

On balance, the commission considers that the creation of a single-purpose Crown agency would be the best way to urgently improve New Zealand’s poor health and safety performance. The agency would work with MBIE on health and safety policy and would be accountable to the minister for health and safety administration in accordance with agreed performance measures.

And there have been calls to extend the reforms to all workplaces because of New Zealand’s poor safety record compared with other countries. Echoing the views of others, Green MP Kevin Hague has blamed the deregulatory ideology of the 1980s and 1990s:

Green MP Kevin Hague said a “wave of ideology” towards small government in the 1980s and 1990s led to the disaster.

Regulations were stripped away, and there was a catastrophic failure of government as a regulator.

The two mines inspectors had repeatedly called for greater resources to do their jobs, were not trained in systems audits and were unclear on how to interpret the standard.

“It is the failure of the regulatory regime, of the Government as a regulator, and it is the failure of deregulation that has led to a situation where this company, Pike River Coal, could take those catastrophic risks.”

But it is the failure of something much more basic and fundamental than regulation: It is the failure of our society to reproduce its human and social capital in their most crucial and important forms.

Business NZ’s concern over the “human capital depreciation” that will supposedly result from parental leave is a concern for production over reproduction in the most apt and pointed sense.

But at least it provides us with a neat and concise phrase to describe how little we, as a country, appreciate our precious human capital – and how we have increasingly mined it.

Now I think we all know what ‘human capital depreciation‘  really means.