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it seems obvious that assuming that profitability is a direct function of productivity

is grossly misleading. There are a number of factors which may impact on the
profitability of a company (other than its productivity). As the following video clip
suggests declining profitability reduces the company's ability to pay high salaries
and drives down the graduate premium. As a consequence people see that
investing in education is risky and may leave them with lots of debts rather than
handsome returns.
View the attached video clip (Clip_3_HCT_negative.wmv)
Screening Theory (ST) argues that, despite, prima facie appearance, it is not at all
clear that it is the knowledge and skills acquired at school to which increased
productivity has to be attributed. Much of high school education for instance is
spent on a broad liberal arts curriculum (including, e.g., reading novels, learning
about history, biology): all general knowledge not immediately being linked to
productive outputs. The riddle in the human capital model is: why do employers pay
more to more educated people even though much of the knowledge acquired in
formal eduaction has no plausible bearings on productivity?
ST explains the riddle. The education system, according to ST) is a filtering device
which separates the more talented from the less talented and ranks them.
Employers are not particularly interested in the specific curricular content learned in
school but they appreciate this bundle of natural intelligence, stamina, docility,
communication skills, which a good ranking in school entails. Hence, according to
ST, formal schooling is less about skills formation but about revealing talents.
Especially, as long as it is paid by third parties (be it the government or the students
themselves), formal education is the most cost-effective screening device
employers can think of.
Which theory is right, HCT or ST? In reality it is plausible to assume that both factors
play a part: the skills and attitudes inculcated at school on the one side, and talent
and out of school socialization on the other. It is difficult to separate these factors.
Questions proposed: You may consider the following questions: (i) Which theory
seems more convincing to you, HCT or ST? (ii) What aspect both theories have in
common? (iii) It is argued that the difference between the two theories is important
because they may lead to different policies. Can you imagine in which way?
General advice about inserted activities or questions: Generally activities
are meant as contolling your own understanding and skills. You are
welcome to post your solution. Once a correct solution is posted there is
no need for repetition.
-- Schultz, T. W. (1961). Investment in Human Capital. American Economic Review,
51, 1-17.

Clip 3 HCT negative.wmv

Clip 3 HCT negative.mp4

Both ST and HCT factors play a role in the impact of profitability of

companies. I think when examining the human capital model, employers
pay for knowledge when it is applied to specific occupations such as:
physicians, nurses, lawyers, etc. I think it is according to the value of that
position and what the employer has assigned to the value of the educational
skills. Even though education may be risky it is better to be educated with a
skill than not have a skill at all.
It takes more to becoming a lawyer or a doctor than just wanting to be one.
There are specific and basic requirements along with the intermediate and
advanced requirements to being able to work in certain types of careers. We
are not born with those skills they are attainable skills that takes years of
textbook study as well as hands on training or on the job training.
High school is the foundation for learning new skills that are attainable; by
learning the foundations of reading, writing and arithmetic. Without having
this knowledge how can one attain or be able to achieve a higher curve of
learning beyond the high school arena. Biology is necessary for an
occupation in the medical field, our bodies are based on biology and science,
and the ability to read well and have mathematical knowledge to perform
research that is biologically based while using skills that heal our bodies. The
chemical elements of knowing the periodic table all of which may be used in
our prescription medicines. Knowledge builds on previous knowledge so both
theories are interconnected since HCT is provided by humans that have the
specialized ST knowledge. In other words you cant have one without the
The theory that seems more convincing to me is the HCT theory. It leads to
different policies in that it focuses on human output in business to produce
labor hours in a company or corporation. Human capital is needed in
occupations that are growing, and not as much human capital is needed in
the declining occupations. In our present society individuals must be
knowledgeable in a skill in order to enter the workforce. I do agree that the
system of education attempts to divide who will be successful. But on the
other hand there are many other factors that decide on success in an
individuals lifetime, and not having an education is one of the main factors
that can give that extra push to success.
Education is only part of the equation, but a very important part of the
equation. That goes back to the Screening Theory and the filtering. Just

because an individual has a higher education does not mean he/she will not
be filtered out of the equation. Individuals get caught up in governmental
policies and legislation, human resources policies, paying higher salaries or
salary caps, which the ability to pay higher salaries drives down the graduate
premium. As risky as education may seem to some; it is still even more risky
to apply for a job without it. I think that HCT theory is more prevalent.

Schultz, T. W. (1961). Investment in Human Capital. American Economic

Review, 51, 1-17.