Concept Of Human Capital And Human Capital Formation

HUMAN CAPITAL FORMATION

Human capital refers to the stock of 'skill and expertise' of a nation at a point of time in the economy. It is the sum total of skill and expertise of engineers, doctors, professionals, professors and workers of all types who are engaged (or have the capacity and expertise to be engaged) in the process of production in the economy.

Human capital formation is also refers to the process of adding to the stock of human capital over a period of time.

Human Capital is Different from Physical Capital and Financial Capital

• Physical capital formation refers to the produced means of production in the economy. Stock of physical capital measures production capacity of a nation.

• Financial capital refers to paper claims against physical capital.

• Human capital refers to skill and expertise acquired by man over time. Human capital is the cause behind physical capital. Indeed, it is the ultimate cause of an exponential pace of growth and development in advanced economies of the world.

DETERMINANTS/SOURCES OF HUMAN CAPITAL FORMATION

Determinants of human capital refer to the sources of human capital formation, or the ways of adding to the stock of human capital.

Following are some important ways of adding to the existing stock of human capital:

• Expenditure on Education:  Expenditure on education is the most effective way of rising a productive workforce in the country. It is, therefore, a very important determinant of human capital formation in the economy.

Most families decide to incur huge expenditure on education, even when they have to raise loans. Reason: Returns on such expenditure are sustantially large.

Education enables an individual to make a good living throughout his life. His total earnings during his life span would far exceed his initial expenditure on education.

Important points:

° Monetary benefits of education (in terms of earnings of the educated person during his life time) far exceed the cost of education.

° The difference between benefit and cost is an approximate market value of human capital formation.

• Expenditure on Health: "A sound mind in a sound body" is an old saying statement which indirectly signifies a huge capital formation. Expenditure on health makes a man more efficient and, therefore, more productive. His contribution to the production process tends to rise. He adds more to GDP of the nation than a sick person.

Expenditure on health, therefore, is an important determinant of human capital formation.

• On-the-job Training: On-the-job training helps workers to hone/sharpen their specialised skills. It enables the workers to raise the level of their efficiency as well as their productivity.

Firms are always inclined to undertake 'on-the-job training' programmes. Because, it returns (on account of enhanced productivity) far exceed the cost of such programmes which they held.

As we consider, expenditure on such training programmes, therefore, is yet another important determinant (and a source) of human capital formation.

• Study Programmes for Adults: Other than formal education at the primary, secondary and university levels, the Government and NGO's organize study programmes for adults to make them proficient in their work areas. This enhances their productivity, serving as a source of human capital formation.
• Migration: Migration contributes to human capital formation as it facilitates utilization of (otherwise) inactive skills of the people, or it facilitates fuller/better utilization of the people's skills.

Migration involves cost:

(1) Cost of transportation from one place to the other, and

(2) Cost of living in different social environment.

Yet people migrate in search of better job opportunities. Because:

Gains of migration (in terms of higher salaries) are greater than the cost of migration.

Implying that migration leads to human capital formation, through fuller/better utilisation of skills.

• Expenditure on Information: Information relating to job markets and educational institutions offering specialised skills is an important determinant or good source of skill formation. It enables people to actualise their productive potential to do better work. Accordingly, expenditure on information is another determinant or source of human capital formation in the economy.

Briefly, human capital formation is promoted by investment ion education and health, besides 'on-the-job training' programmes. Investment on migration and information relating to availability of specialised skills and job markets also contributes to human capital formation.