Economics of human skills

The University of Chicago's James Heckman gave a talk, 'The Economics of Human Skills: Evidence and Policy Implications', at the University of Melbourne today. The slides accompanying the talk are here.

Heckman's argument centres on the idea that wages are the source of most people's income with wage inequalities reflecting differences in abilities and skills, broadly conceived as intelligence skills such as IQ and socio-emotional skills ('non-cognitive skills'). Like Plato, Heckman believes major sources of inequality are based on 'ability gaps' created in families. Ability gaps open up even before formal schooling begins and are produced by differences in family environments. His view is that early experiences can modify the biochemistry and architecture of neural circuits and that these early effects have major implications for the way we devise education policy. We need to reduce these inequalities early.

Targeting disadvantaged kids improves equity and has no bad efficiency effects provided the money gets targeted towards the kids. This contrasts with policies directed towards later age groups. Indeed the returns to giving teachers more money and reducing class size are small as are more specific programs that reduce tuition charges for the disadvantaged and job training programs. Basically the damage has already been done at earlier ages.

The idea is to target disadvantaged very young kids and their mothers where rates of return on 'educational investment' (broadly conceived) are very high. 'Skills-beget-skills' so that the emphasis of educational policy should be on the dynamics of skill formation.The talk is based on a book with Alan Kreuger and a productivity argument, presented here.

The difficulty is that early family environments have deteriorated around the world over the past 40 years. Increasing numbers of children live (and/or were born) into single-parent homes and live (and/or were born) into poverty. This has led to a decline in the quality of the labour force which will reduce productivity in the years to come. Educational performance is declining (for example numbers completing high schools are falling) and crime rates are increasing because of a strong negative relation between crime and education. It is cheaper to deal with crime by using education than by employing more police. There is also evidence that early interventions reduce crime.

Children cannot buy good parents - to Heckman this is the key credit constraint. A young Mozart cannot buy himself a good environment to be creative in. On the other hand credit constraints and low family incomes are not major determinants of college enrollments. Indeed, the observed relation between incomes and university participation is spurious because incomes then are a good predictor of the circumstances by which children are brought up at young ages. Uneducated single mothers with low cognitive ability have children early and provide low cognitive and emotional stimulation. Early interventions such as pre-school programs have strong long-term effects in increasing educational attainment, income and in reducing crime.

Moreover the relation between current and future investments in education was 'approximately Leontief' - there was little substitution between these alternative forms of investment. If you don't get to educate through stimulation kids when they are young it is expensive to do it later and there are then big equity/efficiency tradeoffs.

It was a fascinating talk by a major University of Chicago economist. My major criticism of the talk is that the early interventions were not accurately identified. Heckman talked about taking single mothers into daycare groups where both where education focused on stimulating children by reading to them (very important!), taking them to the zoo etc. He called this 'enriched child-care'. He argued that single mothers tended to have poor cognitive and non-cognitive skills and didn't create stimulating environments for their children, and that this could be addressed.

I also think there are political and practical constraints in 'interfering in families' that limit the practicality of Heckman's views. That the effects of early interventions are strong does not, in itself, drive a strong case for public policy based on them.

I was interested that Heckman believes the evidence he provided refutes the R.J. Herrnstein and Charles Murray thesis, in The Bell Curve , that only cognitive skills matter and that these are genetically-determined. Heckman disagrees with this (he believes that IQ itself is manipulable) but did claim the ability gaps, though not genetic, were determined early by the family environment. And it is true that abilities, broadly conceived, don't change much after age 8.

Fascinating stuff.

Update: See the comments on this by Joshua Gans with more hyperlinks to Heckman's work here.