There are several hindrances to the building up of Human Capital in society. Laws that prohibit wages below a floor value are an example. An arbitrary restriction, decided by a government committee, modifies contractual terms with consequences. Committees are far removed from ground realities. A contract is an outcome of consenting private parties.

My earlier post The Effect of Minimum Wages on the Economy discusses how laws affect contract terms, in more detail.

One such 'modification' is the prohibition with regards to the age limit. That is, the employers no longer hire a person below, for instance, age 16. Before such modifications became law, employers employed apprentices for a small wage.

Despite the low earnings, the apprentice learned valuable skills. Skills that would otherwise come at a high price - say, by an expensive college degree. Or, toiling away during adulthood when learning ability would have diminished.

Several successful entrepreneurs and investors attribute their success to their first job. Such as Warren Buffet, Frank W Woolworth or the architect, Paul Williams. Each of whom started off as apprentices at low wages. One would ask why not employers pay a higher wage to interns. Well, it's the free market. If you force down a law, employers will be less willing to hire.

Wages are ‘high’ or ‘low’ only in relation to the output produced by the labor. Interns are expensive, at least for the first few months or years depending on the job. They bring little skills at the beginning. From the point of view of the employer, he has no basis to assess a first-time employee. It is akin to throwing a dart in the dark.

Professional careers like lawyers, accountants or architects have internship built-in the curriculum. It's delightful to watch the transformation in human capital that this system brings. Young interns go on to become influential business advisers. In fact, in this system, a high wage is not usually encouraged. Such high wages negate the value of the great learning experience at these firms.

Several attributes develop along with an internship. These are learning or habits added to the core tasks (such as accounting or making burgers). Some of these attributes are

  • Learning to come to the office every day, on time
  • Being honest with assets, transactions
  • Being courteous to customers and fellow employees
  • Learning basic communication skills
  • Familiarity with office organisation, delegation, completing tasks etc.

The earlier one adapts these skills, the better. It gets harder later in life to pick up on these. The shrinking of the apprenticeship market - by law or by society’s perceptions - has consequences. Human Capital is the longest gestation asset. A generation that misses out on work opportunities will turn out different. Low human capital signifies low productivity.

A lopsided focus on degrees and certificates is causing people to delay working. The U.S has a disproportionate number of people shooting for Ph.Ds. Not everyone looks cut out for this. Added to this, unemployment benefits deter people from seeking work. Along with work come valuable and intangible skills. An unemployment benefit can only help you buy bread, for today. What about skills, like life skills?

The market left to its devices sorts this out best. Laws frustrate the free meeting of appropriate demand and supply factors. For example, anti child-labor laws have unintended side-effects. In poor countries - where human and financial capital is low - the escape from poverty is by working early in life. There is no honor in shunning these jobs by labeling them as 'menial'.

Human rights activities do a disservice by preventing jobs from entering such countries. The campaign on the front pages of media highlights the 'plight' of working conditions. They don't highlight the aftermath of losing those jobs. Those children end up in prostitution or begging at traffic signals.

Developing human capital is important. A policy in favor of regulating hazardous jobs, such as mining, is welcome. Any other intervention is needless. That policy prescriptions have gone beyond its original intent is the moot point.

Inequities reduce when the full range of jobs are available. One must remember that interns don't remain interns for life. People move up the ladder. Point being, the ladder is available, and people start the climb without force or friction.

Today we have a situation, where the ladder is available, the rungs are missing. Allowing the full range of contractual terms possible is akin to having many rungs in a ladder. That helps even the weakest to climb.