10 Human Capital Formation

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HUMAN CAPITAL FORMATION

Development Economicsth

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Solano Da Silva


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Objective >

To understand the issue of human capital formation in thecontext of developing economies.1) Introduction2) Sources of human capital

3) Indicators of human capital formation4) Importance of human capital formation5) Measuring the contribution of human capital

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formation6) Problems and issues in human capital formation7) Manpower planning


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1. Introduction >>

[Output more than physical inputs] Statistical investigation inDeveloped economies have shown that output has increased at a

much higher rate than can be explained in terms of increases in

physical inputs (labour and physical capital).

[Reason] The quality of humans as productive agents has improvedover the years due to improvements in health care, education and

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improving skills.

Improvements in education, skills and health amounting to improvedproductivity is known as human capital formation.

alongside physical capital formation human capital formation is

also seen as playing an important role in economic development. Quality of human resources is a factor of production.


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1. Introduction >>

[Definition: individual level] Human capital refers to the stock ofskills and knowledge gained by a worker through education and

experience to perform labour so as to produce economic value.

[Definition: aggregate] Human capital is the stock of competencies,

knowledge, social and personality attributes, including creativity,embodied in the ability to perform labor so as to produce economic

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value.


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2. Sources of human capital >>

Any factor which augments labours productive capacity contributesto the formation of human capital:

1. Formal education

2. Study programmes for adults3. On-job-training

4. Health facilities5. Migration of individuals and families

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Of all the above, education has received the most attention.


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3. Indicators of human capital formation >>

Two categories of human resource development indicators:1. Those which measure a countrys stock of human capital

2. Those which measure the gross or net additions to this

stock/rate of human capital formation.

Two types of indicators belong to the first category:A. Levels of education attainment

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i. At all three levelsi. Especially last two levels.

ii. Those completing scientific and technical courses.B. Proportion of population or labour force in high level

occupations: including doctors, scientists, engineers, technicians,

teachers, nurses and medical assistants.


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4. Importance of human capital formation >>

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1. The effective and efficient utilisation of both natural andphysical capital is dependent upon human capital.

2. Education contributes to economic growth

Studies like Edward F. Denison shown education contributed23% of growth of total real income in US (1929-57).

Education contributes to economic growth by:

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. reat ng more pro uct ve a our orceii. Education expands employment opportunities

iii. Creates a new class of educated leadersiv. Helps modernisation by shaping attitudes

3. Education and reduction in income inequalities

It is hoped that in many under-developed economies educationwill enable the poor to rise.

Doubtful this has actually happened.


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4. Education and rural development By changing attitudes.

Adoption of modern techniques Entrepreneurial spirit: setting up cottage industries.

5. Education and role in population control In particular womens education

6. Other benefits of education

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enerat ona sp over

Disciplined citizenry

Better political culture7. Role of on-the-job training

Such training increases the skill and efficiency of workers. Usually provided by firms.

8. Role of health in economic development

Investment in preventive and curative medicine and nutrition

improves the productivity of the labour force.


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5. Measuring the contribution of human capital formation >>

Difficult to measure the contribution of education and health toeconomic development.

1. The relationship between expenditure on education and

income and physical capital formation

Based on Theodore W. Schultz study of US investment ineducation (1900-1956).

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2. Residual approach in determining the contribution of

education to GNP

By determining the contribution of other physical inputs such

as labour and capital the residual is taken to be the contributionof other factors such as education.


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5. Measuring the contribution of human capital formation >>

3. Rate of return from expenditure on education Measuring income flows assumed to result from education

Study by Gary Becker measured income differentialsattributable to cost of acquiring college education for urbanwhite males: 12.5% (1940) and 10% (1950).

[Criticisms] Differentials of education not solely result offormal education but: on-the-job training, experience, natural

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ability differences, social status, etc.

4. Inter-country correlations of school enrolment ratios andGNP

Study by Svennilson, Edding and Elvin compared enrolmentratios in 3 age groups in 1958 for 22 countries with theirGNP/capita.


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6. Problems and Issues in human capital formation >>

Human capital argues that whatever be the stock of physical capitalunless the quality of labour improves the same would not translate

into economic growth.

However it is extremely difficult to measure how human capital

translates into economic growth:i. Their direct output is immeasurable

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ii. Effects are widely diffusediii. Effects spread over a long period of time

iv. Success is dependent on a number of complementary measures

Criticisms of attempts to measure: tend to lump all kinds ofeducation together without delineating differences, overlook theimportance of complementary policies.


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6. Problems and Issues in human capital formation >>

Instead of measuring what is needed is a careful delineation ofpriorities and judicious strategy of human resource development

based on such priorities: Education planning needs to satisfy the following conditions:1. Based on systematic assessment of human resource problems

and requirements. Analysis should include:a. Manpower requirements

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b. System of formal educationc. On-job-training and adult education

d. Structure of incentives and utilisation of high levelmanpower

2. Assess traditional educational patterns and make necessarymodifications.


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7. Manpower planning > Ingredients of, >>

Refers to arrangements undertaken to ensure the availability ofskilled and trained personnel to implement a countrys economic

and social objectives.

1. Manpower forecastingSet a target for national income and make sectoral & industrywise estimates.

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2. Estimating availability

Estimates of the available supply and needs in variousoccupational categories.

3. Reconciling requirements and availability

Matching requirements with estimates. May include changes inthe educational system and training institutions.


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7. Manpower planning > Problems in estimating >>

1. Lack of dataDifficult to assess manpower availability and needs.

2. Problem of methodology

Projecting occupational structure with the pattern of

educational qualifications.

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3. Reconciling manpower requirements through theeducational system

Difficult for education system to quickly respond to changes inmanpower requirement.


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REFERENCES

Misra, S. K. and Puri, V. K. (2010), Population and Human Capital Formation inEconomic Development, in Development and Planning: Theory and Practices, 13th ed.Himalaya Publishing House Pvt. Ltd. Mumbai, pp. 327 338.

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10 Human Capital Formation