Human Capital Theory

Human Capital Theoryby Dr.I.C.Awasthi

Structure of Presentation•Concept•Investment in Human Capital•Shying Away from Investment in Man•Economic Growth from Human Capital•The Human Capital Model•Indigenous Characteristics•Impacts of Human Capital

Contd.

• Conventional Measurement Method of Human Capital

- Output-Based Approach - Cost-Based Approach - Income-Based Approach

• Demerits of the Conventional Measurement• New Approach of the Measurement• Policy Implications

Concept• Development was normally equated to

industrialization, higher levels of GNP per capita and lower shares of agriculture

• Assumptions have been challenged

• Physical quality of life is an essential component of development

Contd

• Same levels of per capita income with huge differences in quality of life

• Morris David Morris (1979)index of basic needs

• Huge per capita income does not necessarily ensure high quality of life

Contd.

• Human capital theory suggests education or training raises the productivity of workers

• State intervention might be necessary to prevent development’s harmful side effects

• Neo-classical argument are unsustainable

• Social spending stimulates growth

Contd.

Investment in Human Capital

• National output have been large compared with other factors

• What we call consumption constitutes investment in human capital (direct expenditures on education, health, and internal migration)

• Earnings foregone

Contd.

Shying away from Investment in Man

• Importance recognised

• Seldom incorporated in core of economics

Economic Growth from Human Capital

• Paradoxes and puzzles about growing economy (farm to non-farm workers or Non-white to White or Negros to Whites or South to North or West)

• Migratory workers

Contd

• Amount of human investment explain differences

• Human resources have quantitative and qualitative dimensions

• Some activities affect future wellbeing the others present

• Some affect money income while others psychic income

• Human capital that influences both future money income and psychic income

Contd

• Forms of human investment are schooling, on the job training, medical care and migration and differ their effects on earnings.

• Improve skills, knowledge, health and raise income (money and non-monetary

• Tremendous amount of circumstantial evidences and explains huge contribution

• Stock of natural resources leads faster progress

Contd.

• No longer tenable (Japan a prime example)

• Denmark and Switzerland

• Distinctive nature of human capital– embodies in men, future source of earnings and satisfaction

Empirical phenomena:

• Earnings typically increase with age at decreasing rate. Both the rate of increase and the rate of retardation tend to be positively related to the level of skill.

Contd.

• Unemployment rates tend to be inversely related to the level of skill

• Younger persons change jobs more frequently and receive more schooling and on the job training than the older persons do.

• The distribution of earnings is positively skewed, especially among professional and other skilled persons

• Abler persons receive more education and other kinds of training than others

Contd.

Ways of developing human capital (T.W. Schultz)

(i) Provision of health facilities

(ii) Provision of on the job training

(iii) Arranging education

(iv) Study and extension services for adults

(v) Provision of adequate migration facilities

Human Capital Model

• Individual decision to invest in --Net present value of the costs (initial period) and benefits of such an investment (subsequent periods)

• Higher marginal products and higher wages

• Decompose training into specific and general training

Contd.

Contd

• Benefits accrue one firm and more than one firms, respectively

• Both forms of trainings lower the starting wage and increase wage growth.

• Rates of return on human capital low for specific training and higher for general training

Contd.

Indigenous Characteristics

• Human capital expandable and self-generating; transportable and shareable characteristic

• Stock of knowledge increases individuals’ human capital and expanded by either endogenous or exogenous factors

• Extend the volume of human capital

Contd.

• Transportable and shareable characteristics (original holder of knowledge can distribute his/her knowledge to others) ---expand the range

Impacts of Human Capital

• Individual, Organization, and Society

• Increment of an individual’s productivity, mobility

• Collective competences-- organization

Contd

• Synthesis of individual and organizational capital to that of societal capital

• Human capital can increase social consciousness --‘democracy, human rights, and political stability’ on common consciousness of social constituents

Contd.

Conventional Measurement of Human Capital

• Output (school enrollment rates, scholastic attainments, adult literacy, and average years of schooling are the examples of output-based approach)

• Cost (costs paid for obtaining knowledge)

• Income (individual’s benefits obtained by education and training investment)

Contd.

Output based approach• Drawback that a student’s effectiveness

can be recognized after participating in production activities

• Assumes that an individual’s productivity is increased in proportion to his/her average years of schooling

• Ratio between skilled-adults and total adults to measure the stock of human capital (Romer,1990)

Contd

• Ratio between literate adults and total adults, to measure the stock of human capital (OECD)

Cost-Based Approach

• Summing costs invested for one’s human capital

• Discounted value/depreciation over a period of time

Contd.

Income-Based Approach

• Based on the returns which an individual obtains from a labor market throughout education investment

• Human-unrelated factors’ can more influence an individual’s income

Contd

Critique of conventional measurement theory

• Individual’s human capital increases his/her employability

• Slightly considers the qualitative benefits of human capital such as family health, fertility and child mortality

• social non-monetary benefits ‘lower fertility rates, lower population rates, public health, democratization, human rights, political stability, poverty reduction, crime rates etc

Contd

• Social capital can be related to human capital (social relations, social network, for example) with productive benefits

• Skills and knowledge through family networking

• Increase of human capital can rarely ensure that of social progress

Contd.

New Approach of the Measurement

• UNDP-- Human Development Index

• Index is constituted to health, knowledge, and standard living with many sub-variables such as life expectancy at birth, adult literacy rate, gross enrollment ratio, and GDP per capita

• ILO (Key Indicators of the Labour Market) with human development focus

Contd.Policy Implications• Difficult to identify and measure accurately

and directly • Expanded toward ‘human development’

with one’s wellbeing on health, knowledge, and standard living

• Conventional measurement focuses on the monetary perspective, it neglects the importance of its non-monetary aspects such as creativity, motivation, social networks etc

Contd.

• Human capital should be measured on all of monetary and non-monetary characteristic of human capital

• Effective and efficient database to present estimates of human capital stock and flow at all levels such as individual, organization, and/or nation.

Contd

Suggested Readings • Alex Alexnder V.(1983), Human Capital Approach to Economic

Development, Metropolitan.• Blaugh, M. (1966), Economic Interpretation of the Private Demand

for Education, Economics, Economica.• Block, F. (1990), Post Industrial Possibilities: A Critique of

Economic Discourse, Los Angeles: University of California Press.• Galor, Oded and Omer Moav (2001) “Evolution and Growth”,

European Economic Review 45, 718-729.• Gary S. Becker (1964, 1993, 3rd ed.). Human Capital: A Theoretical

and Empirical Analysis, with Special Reference to Education. Chicago, University of Chicago Press.

• Hanifan, L. J. (1916) "The rural school community center", Annals of the American Academy of Political and Social Science 67: 130-138. Also see Hanifan, L. J. (1920), The Community Center, Boston: Silver Burdett.

• Kwon Ae-Bong (2009), Human Capital and Its Measurement, The 3rd OECD World Forum on “Statistics, Knowledge and Policy” Harting Progress, Building Visions, Improving Life Busan, Korea - 27-30 October.

Contd.

• Meier, Gerald M. (1964), Leading Issues in Development Economics, Oxford University Press (Investment in Human Capital--Note, pp.266-271).

• Moon, Bruce E. and William J. Dixon (1992), “Basic needs and Growth-Welfare Trade-Offs.”International Studies Quarterly, 36, 191-210.

• Morris David Morris (1979), Measuring the Conditions of the World's Poor: The Physical Quality of Life Index, New York: Pergamon Press, published for the Overseas Development Council.

• Scott R. Sweetland (1996), Human Capital Theory: Foundations of Field Enquiry, Review of Educational Research, fall.

• Schuller, T and Field, J (1998), Social Capital, Human Capital and the Learning Society, International Journal of Lifelong Education, 17, 2, pp 226-235.

• Theodore William Schultz (1971), Investment in Human Capital: The Role of Education and of Research, New York: Free Press.

• Theodore William Schultz (Ed), (1962), Investment in Human Beings, Chicago: University of Chicago Press.