Final answer:
Human capital investment explains wage differentials by positing that personal investments in education lead to higher productivity and wages. Educational attainment enhances a person's economic value and commands higher wages, supported by evidence showing long-term benefits from such investments. Moreover, public investments in education systems are crucial for creating a skilled workforce that contributes to economic growth.
Step-by-step explanation:
The concept of human capital investment explains wage differentials by positing that investments in education increase an individual's productivity, which in turn is reflected in higher wages. The idea is closely related to the notion that educational attainment and skill development can enhance a person's economic value, leading to better job opportunities and greater earning potential. This investment in human capital, including time and money spent on education, health, and acquiring skills, is expected to yield future benefits in the form of increased earnings and improved job prospects.
In essence, wage differentials can often be attributed to differences in the levels of human capital among workers. Those with higher levels of education and better skills are generally able to command higher wages in the labor market. This correlation is supported by evidence, such as the experiment in Guatemala which showed that children with better nutrition - a form of human capital - earned higher wages as adults.
Furthermore, public investment in human capital, like education systems subsidized by governments, also plays a substantial role in creating a skilled workforce that can contribute to higher rates of economic growth, particularly in low-income countries. However, there are discussions around the effectiveness of increased government spending on education in countries like the United States.