As we discussed in the previous chapter, the word caital usually refers to the economy’s stock of equipment and structures. The capital stock includes the farmer’s tractor, the manufacturer’s factory, and the teacher’s chalkboard. The essence of capital is that it is a factor )f production that itself has been produced:

There is another type of capital that, while less tangible than physical capital, is just as important to the economy’s production. Human capital is the accumulation of investments in people. The most important type of human capital is education. Like all forms of capital, education represents an expenditure of resources at one point in time to raise’ ·productivity in the future. But unlike- an investment in other forms of capital, an investment in education is tied to a specific person, and this linkage is what makes it human capital.

Not surprisingly, workers with more human capital on average earn more than those with less human capital. College graduates in the United States, for example, earn almost twice as much as those workers who end their education with a high school diploma. This large difference has been documented in many countries around the world. It tends to be even larger in less developed countries, where educated workers are in scarce supply.

it is easy to see why education raises wages from the perspective of supply and demand, Firms the demanders of labor-are willing to pay more for the highly educated because highly educated workers have higher marginal products. Workers-the suppliers of labor-are willing to pay the cost of becoming educated only if there is a reward for doing so. In essence, the difference in wages between highly educated workers and less educated worked may be’ considered a compensating differential for the cost of becoming educated.

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