Chapter – 5
HUMAN CAPITAL FORMATION
One factor that has made a great difference in the evolution of mankind is man’s capacity to store and
transmit knowledge, through conversation, through songs and through elaborate lectures. However we need a
good deal of training and skill to do things efficiently. An educated person is able to generate more income
than an uneducated person because of skill and training and consequently is able to contribute more to
economic growth.
Education is sought as it confers highly valued benefits such as :
● higher earning capacity on people;
● gives one a better social standing and pride;
● enables one to make better choices in life;
● provides knowledge to understand the changes taking place in society;
● stimulates innovations.
● facilitates adaptation of new technologies.
● accelerates the development process of a nation.
SOURCES OF HUMAN CAPITAL There are several sources of human capital.Education,
investments in health, on- the- job training, migration and information are the other sources
of human capital formation.
Education- Investment in education is considered as one of the main sources of human
capital.
Spending on education by individuals is similar to spending on capital goods by companies
with the
objective of increasing future profits over a period of time. Likewise, individuals invest in
education with
the objective of increasing their future income.
Health- Like education, health is also considered as an important input for the development
of a nation as much as it is important for the development of an individual. A sick labourer
without access to medical facilities is compelled to abstain from work and there is loss of
productivity. Hence, expenditure on health is an important source of human capital
formation.
Preventive medicine (vaccination), curative medicine (medical intervention during
illness), social
medicine (spread of health literacy) and provision of clean drinking water and good
sanitation are the
various forms of health expenditures. Health expenditure directly increases the supply of
healthy labour
force and is, thus, a source of human capital formation.
On-the- job-training- Firms spend on giving on-the- job-training to their workers. This may
take different forms:
one, the workers may be trained in the firm itself under the supervision of a skilled worker;
two, the workers may be sent for off-campus training.
In both these cases firms incur some expenses. Firms will, thus, insist that the workers should
work for a specific period of time, after their on-the-job training, during which it can recover
the benefits of the enhanced productivity owing to the training. Expenditure regarding on-
the-job training is a source of human capital formation as the return of such
expenditure in the form of enhanced labour productivity is more than the cost of it.
Migration - People migrate in search of jobs that fetch them higher salaries than what they
may get in their native places. Unemployment is the reason for the rural-urban migration in
India. Technically qualified persons, like engineers and doctors, migrate to other countries
because of higher salaries that they may get in such countries. Migration in both these cases
1
, involves cost of transport, higher cost of living in the migrated places and psychic costs
of living in a strange socio- cultural setup. The enhanced earnings in the new place
outweigh the costs of migration; hence, expenditure on migration is also a source of human
capital formation.
Information- People spend to acquire information relating to the labour market and other
markets like education and health. For example, people want to know the level of salaries
associated with various types of jobs, whether the educational institutions provide the right
type of employable skills and at what cost. This information is necessary to make decisions
regarding investments in human capital as well as for efficient utilisation of the acquired
human capital stock. Expenditure incurred for acquiring information relating to the labour
market and other markets is also a source of human capital formation.
Human Capital and Economic Growth:
● We know that the labour skill of an educated person is more than that of an uneducated
person. Economic growth means the increase in real national income of a country;
naturally, the contribution of the educated person to economic growth is more than that
of an illiterate person. Hence a software professional generates more income than a worker
in a factory.
● Similarly if a healthy person could provide uninterrupted labour supply for a longer
period of time, then health is also an important factor for economic growth.
● Thus, both education and health, along with many other factors like on-the-job training,
job market information and migration, increase an individual’s income generating
capacity.
This enhanced skill/productivity of human beings/human capital
● contributes substantially towards increasing labour productivity.
● stimulates innovations and
● creates ability to absorb new technologies.
Empirical evidence to prove that increase in human capital causes economic growth is rather
unclear. This may be because of measurement problems. For example:
♦ education measured in terms of years of schooling, teacher -pupil ratio and enrolment rates
may not reflect the quality of education;
♦ health services measured in monetary terms, life expectancy and mortality rates may not
reflect the true health status of the people in a country.
Using the indicators mentioned above, an analysis of improvement in education and health sectors
and growth in real per capita income in both developing and developed countries shows that the
human capital growth in developing countries has been faster but the growth of per capita real
income has not been that fast. There are reasons to believe that the causality between human
capital and economic growth flows in either directions. That is, higher income causes building of
high level of human capital and vice versa.
It is difficult to establish a cause and effect relation from the growth of human capital
(education and health) to economic growth but these sectors have grown simultaneously. Growth
in each sector probably has reinforced the growth of every other sector.
The Draft National Education Policy 2019
This policy states that “India aspires to take its place beside the United States and China
as the third largest economy by 2030-2032….
India is the sixth largest economy now and we will reach five trillion economy in five-seven
2
HUMAN CAPITAL FORMATION
One factor that has made a great difference in the evolution of mankind is man’s capacity to store and
transmit knowledge, through conversation, through songs and through elaborate lectures. However we need a
good deal of training and skill to do things efficiently. An educated person is able to generate more income
than an uneducated person because of skill and training and consequently is able to contribute more to
economic growth.
Education is sought as it confers highly valued benefits such as :
● higher earning capacity on people;
● gives one a better social standing and pride;
● enables one to make better choices in life;
● provides knowledge to understand the changes taking place in society;
● stimulates innovations.
● facilitates adaptation of new technologies.
● accelerates the development process of a nation.
SOURCES OF HUMAN CAPITAL There are several sources of human capital.Education,
investments in health, on- the- job training, migration and information are the other sources
of human capital formation.
Education- Investment in education is considered as one of the main sources of human
capital.
Spending on education by individuals is similar to spending on capital goods by companies
with the
objective of increasing future profits over a period of time. Likewise, individuals invest in
education with
the objective of increasing their future income.
Health- Like education, health is also considered as an important input for the development
of a nation as much as it is important for the development of an individual. A sick labourer
without access to medical facilities is compelled to abstain from work and there is loss of
productivity. Hence, expenditure on health is an important source of human capital
formation.
Preventive medicine (vaccination), curative medicine (medical intervention during
illness), social
medicine (spread of health literacy) and provision of clean drinking water and good
sanitation are the
various forms of health expenditures. Health expenditure directly increases the supply of
healthy labour
force and is, thus, a source of human capital formation.
On-the- job-training- Firms spend on giving on-the- job-training to their workers. This may
take different forms:
one, the workers may be trained in the firm itself under the supervision of a skilled worker;
two, the workers may be sent for off-campus training.
In both these cases firms incur some expenses. Firms will, thus, insist that the workers should
work for a specific period of time, after their on-the-job training, during which it can recover
the benefits of the enhanced productivity owing to the training. Expenditure regarding on-
the-job training is a source of human capital formation as the return of such
expenditure in the form of enhanced labour productivity is more than the cost of it.
Migration - People migrate in search of jobs that fetch them higher salaries than what they
may get in their native places. Unemployment is the reason for the rural-urban migration in
India. Technically qualified persons, like engineers and doctors, migrate to other countries
because of higher salaries that they may get in such countries. Migration in both these cases
1
, involves cost of transport, higher cost of living in the migrated places and psychic costs
of living in a strange socio- cultural setup. The enhanced earnings in the new place
outweigh the costs of migration; hence, expenditure on migration is also a source of human
capital formation.
Information- People spend to acquire information relating to the labour market and other
markets like education and health. For example, people want to know the level of salaries
associated with various types of jobs, whether the educational institutions provide the right
type of employable skills and at what cost. This information is necessary to make decisions
regarding investments in human capital as well as for efficient utilisation of the acquired
human capital stock. Expenditure incurred for acquiring information relating to the labour
market and other markets is also a source of human capital formation.
Human Capital and Economic Growth:
● We know that the labour skill of an educated person is more than that of an uneducated
person. Economic growth means the increase in real national income of a country;
naturally, the contribution of the educated person to economic growth is more than that
of an illiterate person. Hence a software professional generates more income than a worker
in a factory.
● Similarly if a healthy person could provide uninterrupted labour supply for a longer
period of time, then health is also an important factor for economic growth.
● Thus, both education and health, along with many other factors like on-the-job training,
job market information and migration, increase an individual’s income generating
capacity.
This enhanced skill/productivity of human beings/human capital
● contributes substantially towards increasing labour productivity.
● stimulates innovations and
● creates ability to absorb new technologies.
Empirical evidence to prove that increase in human capital causes economic growth is rather
unclear. This may be because of measurement problems. For example:
♦ education measured in terms of years of schooling, teacher -pupil ratio and enrolment rates
may not reflect the quality of education;
♦ health services measured in monetary terms, life expectancy and mortality rates may not
reflect the true health status of the people in a country.
Using the indicators mentioned above, an analysis of improvement in education and health sectors
and growth in real per capita income in both developing and developed countries shows that the
human capital growth in developing countries has been faster but the growth of per capita real
income has not been that fast. There are reasons to believe that the causality between human
capital and economic growth flows in either directions. That is, higher income causes building of
high level of human capital and vice versa.
It is difficult to establish a cause and effect relation from the growth of human capital
(education and health) to economic growth but these sectors have grown simultaneously. Growth
in each sector probably has reinforced the growth of every other sector.
The Draft National Education Policy 2019
This policy states that “India aspires to take its place beside the United States and China
as the third largest economy by 2030-2032….
India is the sixth largest economy now and we will reach five trillion economy in five-seven
2
