Human Capital Theory

by 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

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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

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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

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Human capital theory suggests education or training raises the productivity of workers State intervention might be necessary to prevent developments harmful side effects Neo-classical argument are unsustainable Social spending stimulates growth

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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

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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

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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

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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

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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.

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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

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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

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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

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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

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Indigenous Characteristics Human capital expandable and selfgenerating; 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

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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 individuals productivity, mobility Collective competences-- organization

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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

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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 (individuals benefits obtained by education and training investment)

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Output based approach Drawback that a students effectiveness can be recognized after participating in production activities Assumes that an individuals 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)

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Ratio between literate adults and total adults, to measure the stock of human capital (OECD) Cost-Based Approach Summing costs invested for ones human capital Discounted value/depreciation over a period of time

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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 individuals income

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Critique of conventional measurement theory

Individuals 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

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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

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New Approach of the Measurement UNDP-- Human Development Index Index is constituted to health, knowledge, and standard living with many subvariables 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

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Policy Implications

Difficult to identify and measure accurately and directly Expanded toward human development with ones 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

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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: 130138. 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.

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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.