Human capital encompasses the economic value derived from an individual’s expertise and competencies. It encompasses various assets such as education, training, intelligence, skills, health, as well as desirable qualities like loyalty and punctuality that employers value.
Origins of Human Capital:
- Investment in Education: Similar to how companies invest in capital goods to enhance future profits, individuals invest in education to increase their future income prospects.
- Health: Poor health hampers productivity, as ill laborers lack access to medical facilities and are unable to work. Expenditure on healthcare directly contributes to a healthy workforce, thereby fostering human capital formation.
- On-the-Job Training: Companies bear the cost of training their employees, ensuring that workers stay for a specified period during which they can recoup the benefits of enhanced productivity resulting from the training.
- Migration Expenditure: Migration incurs costs related to transportation, higher living expenses in the new location, and the emotional toll of adapting to a different socio-cultural environment. However, the increased earnings in the new place outweigh the migration costs.
- Information: Access to information is crucial for making informed decisions regarding human capital investments and efficient utilization of acquired skills. Expenses incurred to acquire information related to the labor market and other sectors also contribute to human capital formation.
Role of Human Capital in Economic Growth:
- Economic growth denotes an increase in a country’s real national income. Educated individuals contribute more to economic growth compared to their illiterate counterparts. Similarly, good health enables uninterrupted labor supply over an extended period, making it a vital factor in economic growth. Therefore, education, health, on-the-job training, job market information, and migration all enhance an individual’s income-generating capacity, thereby fostering economic growth.
- Human capital not only boosts labor productivity but also stimulates innovation and the assimilation of new technologies. Education equips individuals with the knowledge to understand societal changes and scientific advancements, facilitating inventions and innovations. Additionally, having an educated workforce enables easy adaptation to new technologies.
- Human capital formation leads to increased participation in economic activities, thus reducing the wealth gap and inequality. Moreover, it contributes to an improved quality of life.
However, despite the faster growth of human capital in developing countries, the growth of per capita real income has not been commensurate. This suggests a bidirectional relationship between human capital and economic growth, where higher income fosters the development of a high level of human capital, while a high level of human capital drives income growth.