After going through this lesson, you shall be able to understand the meaning of human capital and human capital formation. Also, we will explore the various sources of human capital formation.
Human Capital and Human Capital Formation
You can see around yourself people having varied knowledge and skill. Some are doctors, engineers, professors, artisans, scientists, researchers, etc. All these people are capital for the economy. They contribute to the process of economic growth. An educated and skilled labor force is more productive and efficient than an uneducated labor force. Similarly, a healthy person can contribute more effectively to the work.
The stock of such skills and expertise of a nation at a particular point in time is called human capital. In other words, it is the sum total of skills and expertise of all persons engaged in the process of production. Human resource (population) becomes a human capital when it is endowed with education, training, skill, and health. It is the human capital and not the human resource that contributes to the production process and thereby, to economic growth. The contribution of human skills and expertise towards economic growth and development is invaluable. This is because the stock of quality-enriched human capital raises individual efficiency and productivity thereby, raising the aggregate production and economic well-being of a country.
Over time, with constant efforts in the form of investment in education and health, the stock of human capital builds up. The number of skilled and educated professionals (such as doctors, teachers, engineers, etc.) who can contribute positively to the production process also increases. This process of adding to the stock of human capital over time is referred to as human capital formation. For example, if the number of skilled persons in a labor force increases from 1 crore to 1.5 crores, then there is human capital formation by 0.5 crores.
Sources of Human Capital Formation
Human capital formation is an aggregate outcome of the investments in education, health, transport, and communication sector, technical know-how, and on-the-job training and migration. These factors are explained below.
Education: Education increases the productive capacity and productivity of a nation’s workforce by honing their skills. An educated labor force is not only more productive but also increases the acceptability of modern techniques. Besides, education also helps in raising the standard and quality of living. It also encourages the modern attitudes of people. It facilitates a primitive economy to break the shackles of tradition and backwardness.
An investment in the educational sector has twofold benefits. It not only increases the income earning capacity but also reduces the skewed distribution of income, thereby, forming an egalitarian society. Investment in the educational sector has long-lasting returns. It not only enhances the present economic condition but also improves the future prospects of a country.
The importance of education is not only limited to making people educated but also in facilitating an underdeveloped economy to solve different but interrelated macroeconomic problems such as poverty, income inequality, population, investments, and underutilization of resources. Therefore, investment in education must be accorded high priority in a country.
Health: There is a saying “The greatest wealth is health”. The wealth of a country can be increased with the efforts of a healthy workforce. Investment in the health sector increases the efficiency, efficacy, and productivity of a nation’s workforce. In contrast to an unhealthy person, a healthy person can work better with more efficiency and, consequently, can contribute relatively more to the GDP of a country.
Good health and medical facilities not only increase life expectancy but also improve quality and standard of living. Investing in the health sector ensures the perennial and uninterrupted supply of a healthy workforce. Some of the common expenditures incurred in the health sector are on providing better medical facilities, easy availability of life-saving drugs, common vaccination, the spread of medical knowledge, provision of proper sanitation clean drinking water, etc. Thus, the expenditure incurred on health is important in building and maintaining a productive workforce.
On-the-Job Training: Training refers to the act of acquiring skills, knowledge, and competency required to perform a particular job efficiently and effectively. On-the-job training is the most effective kind of training to a trainee, imparting him the technical skills and know-how at the actual work site. In this type of training, a trainee is assisted (or hands-on) and trained by a trainer (usually by an experienced employee) when the trainee is actually doing the job.
This helps the trainee not only to acquire the theoretical and practical skills simultaneously but also enables him to learn from the experiences of his trainer and, thereby, can increase his efficiency and productivity. This is the most common type of training program because the returns in terms of increased productivity far exceed the cost of the training. Thus, the expenditures on such training improve the quality of human capital by enhancing its productivity, efficiency, and income-earning capacity.
Migration: Migration refers to the movement of people from underdeveloped or developing countries to developed countries in search of better avenues. Migration contributes to human capital formation as it facilitates the utilization of inactive or underdeveloped skills of an individual. However, migration involves costs in terms of transportation and cost of living at the migrated places.
Usually, the cost of migration is very high due to the high cost of transportation and high cost of livelihood in developed countries. But still, people migrate in search of better job opportunities and handsome salaries. The migration of human capital helps underdeveloped countries to acquire technical skills, effort-reducing methods, and efficient ways of performing tasks.
These skills and know-how are transmitted by the migrated people to their home country that not only adding to the economic growth and development but also enhancing the human capital of the home country.
Information: The degree of availability of jobs, salaries, and admissions-related information also play an important role in the determination of human capital. The availability of jobs and admissions-related information not only helps the students to opt for the best choice according to their interest areas but also leads to the effective utilization of human skills and knowledge.
Similarly, the availability of medical information and health awareness determines the health of the people. Thus, the expenditure on the spread of information (of education and health) determines the effectiveness and efficacy of human capital.
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