COVID-19 and Human Capital
- Sarah Baek
- Sep 12, 2021
- 4 min read
Updated: Dec 6, 2021
*This article is based on an essay I wrote for the 2021 LSE SU Economics Society Essay Competition.
What do you think will be the effect of the pandemic on young people’s futures? You may want to consider the topic from several angles, such as social mobility.
The essay used the theory of ‘human capital’ to discuss how the COVID-19 has affected young people’s futures, focusing on the effects in the UK. While the most obvious form of capital is assets, such as factories and machines, knowledge and skills are also a form of capital. This form of capital can be acquired through an individual’s investment in education and training which increase one’s productivity.
Disturbed acquisition of knowledge and skills during COVID-19 resulted in learning losses and reductions in the quality of education. Such indicate hindered human capital acquisition for young people, which lowers their future wages and lifetime income. Additionally, the adverse health effects and exacerbated inequality are likely to decrease economic and social mobility.
Given many schools and pupils did not have strategies for remote learning, lockdowns caused learning losses and a reduction in the quality of education. As a result, pupils have acquired less knowledge and skills than they would have during normal conditions (research estimates up to 3 months of a learning gap); in economic terms, they have acquired less human capital.
However, the extent of loss of human capital formation depends on their socio-economic status (SES). Schools with a high percentage of pupils eligible for Free School Meals (FSM), an indicator of economic deprivation, saw score reductions approximately “twice as severe as schools with a low percentage of FSM eligible children.”
This can be explained by the digital divide and the lack of support from parents and schools.
The ‘digital divide’ is a distinction between those who have access to information and communications technologies and those without. 20% of children on FSM had no access to a computer, compared to 7% of other children. Only 51% of households earning between £6000-10,000 had access to the internet compared to 99% of households earning over £40,001.
While parents now face greater responsibilities, parents’ capacity to deliver home-schooling depends on income, education, and technological proficiency. Children of parents with low SES are most likely to miss out on learning opportunities due to the inability to use appropriate learning platforms. Furthermore, schools faced great challenges in initiating and developing an entirely new teaching strategy. Without access to digital resources, and with a lack of adult and institutional support, disadvantaged pupils acquired even less human capital due to greater learning losses and reductions in their quality of education.
Human capital is especially important in a competitive labour market as the demand for labour is determined by the marginal revenue product of labour (MRPL). Whoever has higher productivity, determined from investments into one’s education and training, will receive a higher equilibrium wage. However, firms and employers are likely to perceive graduates to be less productive than counterparts from previous years due to less human capital acquired during COVID-19. Thus, the equilibrium wages and income will fall for young people.
COVID-19 has adversely affected young people’s long-term labour market success.
Firstly, recent graduates have already started their careers at lower wages due to the fact that they have acquired less human capital than pre-pandemic cohorts. Initial experiences “play a significant role in determining long term labour market success.” Starting one’s career with depressed wages during a recession reduces earnings for at least 10-15 years.
Furthermore, spells of unemployment bring future unemployment and lower subsequent earnings. For example, six months of unemployment at age 22 on average results in an 8% lower wage at age 23. Although the effects diminish over time, in the long run, wages are still 2-3% lower than they otherwise would have been, even at ages 30-31.
Finally, workers not only miss out on the acquisition and practice of firm-specific skills, but also experience a deterioration of general skills during unemployment. Such large costs of unemployment, especially while the industry evolves, compromises employability. Thus it is most likely that young people would suffer from hysteresis effects.
The extent of economic effects depends on graduates' wages and ability. Those at the “top of the wage-and-ability distribution suffer less by catching up, on average, within 2-4 years.” However, graduates at the bottom of the distribution experience larger and permanent losses.
Despite COVID-19 being a global pandemic, it is the disadvantaged who face substantial and permanent financial reductions from their investment into human capital due to unsuccessful labour market outcomes. Overall, declining financial returns in terms of lower wages and lifetime income will worsen both income and social mobility for young people.
Health, a kind of human capital and a crucial marker of social mobility, was also affected by COVID-19. Being unhealthy as an adult depresses one’s productivity and adversely affects employment opportunities. This is because the human capital theory and health selection hypothesis suggest that one can earn higher returns from investments into human capital as a healthy individual. Given this, declines in physical and mental health from COVID-19 and their long-term effects imply lower lifetime income.
The Great Gatsby Curve represents that countries with higher levels of income inequality are associated with low intergenerational social mobility. The uneven effects of the pandemic indicate worsening income inequality. Poorer people are more likely to have underlying health conditions such as diabetes or occupations that make them more vulnerable to the virus and economic downturns. They are also less likely to have access to digital resources, and savings for losses or unexpected expenditures. As a result, the extent of depressed wages and lower lifetime income is likely to be larger for those with a low SES. Thus, exacerbated inequality indicates reduced social mobility.
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