HUMAN CAPITAL FORMATION

Development Economics 6th October 2012 Solano Da Silva

Objective > To understand the issue of human capital formation in the context of developing economies. 1) Introduction 2) Sources of human capital 3) Indicators of human capital formation 4) Importance of human capital formation 5) Measuring the contribution of human capital formation 6) Problems and issues in human capital formation 7) Manpower planning

1. Introduction >> [Output more than physical inputs] Statistical investigation in Developed 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 improved over the years due to improvements in health care, education and improving skills. Improvements in education, skills and health amounting to improved productivity 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.
3

1. Introduction >> [Definition: individual level] Human capital refers to the stock of skills 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 value.

2. Sources of human capital >> Any factor which augments labours productive capacity contributes to the formation of human capital: 1. Formal education 2. Study programmes for adults 3. On-job-training 4. Health facilities 5. Migration of individuals and families Of all the above, education has received the most attention.

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 i. At all three levels i. 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.

3. Indicators of human capital formation >>

3. Indicators of human capital formation >>

3. Indicators of human capital formation >>

4. Importance of human capital formation >>

10

4. Importance of human capital formation >> 1. The effective and efficient utilisation of both natural and physical capital is dependent upon human capital.

2. Education contributes to economic growth Studies like Edward F. Denison shown education contributed 23% of growth of total real income in US (1929-57). Education contributes to economic growth by: i. Creating more productive labour force ii. Education expands employment opportunities iii. Creates a new class of educated leaders iv. Helps modernisation by shaping attitudes 3. Education and reduction in income inequalities It is hoped that in many under-developed economies education will enable the poor to rise. Doubtful this has actually happened. 11

4. Importance of human capital formation >> 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 Generational spill over Disciplined citizenry Better political culture 7. 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. 12

5. Measuring the contribution of human capital formation >> Difficult to measure the contribution of education and health to economic development.

1. The relationship between expenditure on education and income and physical capital formation Based on Theodore W. Schultz study of US investment in education (1900-1956). 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 contribution of other factors such as education.

13

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 differentials attributable to cost of acquiring college education for urban white males: 12.5% (1940) and 10% (1950). [Criticisms] Differentials of education not solely result of formal education but: on-the-job training, experience, natural ability differences, social status, etc. 4. Inter-country correlations of school enrolment ratios and GNP Study by Svennilson, Edding and Elvin compared enrolment ratios in 3 age groups in 1958 for 22 countries with their GNP/capita.
14

6. Problems and Issues in human capital formation >> Human capital argues that whatever be the stock of physical capital unless 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 ii. Effects are widely diffused iii. 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 of education together without delineating differences, overlook the importance of complementary policies.
15

6. Problems and Issues in human capital formation >> Instead of measuring what is needed is a careful delineation of priorities 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 b. System of formal education c. On-job-training and adult education d. Structure of incentives and utilisation of high level manpower 2. Assess traditional educational patterns and make necessary modifications.

16

7. Manpower planning > Ingredients of, >> Refers to arrangements undertaken to ensure the availability of skilled and trained personnel to implement a countrys economic and social objectives. 1. Manpower forecasting Set a target for national income and make sectoral & industry wise estimates. 2. Estimating availability Estimates of the available supply and needs in various occupational categories. 3. Reconciling requirements and availability Matching requirements with estimates. May include changes in the educational system and training institutions.
17

7. Manpower planning > Problems in estimating >> 1. Lack of data Difficult to assess manpower availability and needs. 2. Problem of methodology Projecting occupational structure with the pattern of educational qualifications. 3. Reconciling manpower requirements through the educational system Difficult for education system to quickly respond to changes in manpower requirement.

18

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

19