Human capital is the accumulation of investments in people, such as education and on-the-job training.
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 workers may be considered a compensating differential for the cost of becoming educated.