WHAT IS HUMAN CAPITAL?
Just as a country can turn physical resources like land into physical capital like factories, similarly, it can also turn human resources like nurses, farmers, teachers, students into human capital like engineers and doctors. Societies need sufficient human capital in the first place —in the form of competent people who have themselves been educated and trained as professors and other professionals. In other words, we need good human capital to produce other human capital (say, nurses, farmers, teachers, doctors, engineers…). This means that we need investment in human capital to produce more human capital out of human resources.
Let us understand a little more of what human capital means by posing the following questions :
(i) What are the sources of human capital?
(ii) Is there any relation between human capital and economic growth of a country?
(iii) Is the formation of human capital linked to people’s all-round development or, as it is now called, human development?
(iv) What role can the government play in human capital formation in India?
SOURCES OF HUMAN CAPITAL
Investment in education is considered as one of the main sources of human capital. There are several other sources as well. Investments in health, on- thejob training, migration and information are the other sources of human capital formation. Why do your parents spend money on education? Spending on education by individuals is similar to spending on capital goods by companies with the objective of increasing future profits over a period of time.
Likewise, individuals invest in education with the objective of increasing their future income. Like education, health is also considered as an important input for the development of a nation as much as it is important for the development of an individual. Who can work better —a sick person or a person with sound health? A sick labourer without access to medical facilities is compelled to abstain from work and there is loss of productivity. Hence, expenditure on health is an important source of human capital formation. The amount of money spent on preventive medicine (vaccination), curative medicine (medical intervention during illness), social medi-cine (spread of health literacy) and provision of clean drinking water and good sanitation are the various forms of health expenditures.
Health expenditure directly increases the supply of healthy labour force and is, thus, a source of human capital formation. Firms spend on giving on-thejob-training to their workers. This may take different forms: one, the workers may be trained in the firm itself under the supervision of a skilled worker; two, the workers may be sent for off-campus training. In both these cases firms incur some expenses. Firms will, thus, insist that the workers should work for a specific period of time, after their on-the-job training, during which it can recover the benefits of the enhanced productivity owing to the training. Expenditure regarding onthe-job training is a source of human capital formation as the return of such expenditure in the form of enhanced labour productivity is more than the cost of it. People migrate in search of jobs that fetch them higher salaries than what they may get in their native places. Unemployment is the reason for the rural-urban migration in India. Technically qualified persons, like engineers and doctors, migrate to other countries because of higher salaries that they may get in such countries.
Migration in both these cases involves cost of transport, higher cost of living in the migrated places and psychic costs of living in a strange sociocultural setup. The enhanced earnings in the new place outweigh the costs of migration; hence, expenditure on migration is also a source of human capital formation. People spend to acquire information relating to the labour market and other markets like education and health. For example, people want to know the level of salaries associated with various types of jobs, whether the educational institutions provide the right type of employable skills and at what cost. This information is necessary to make decisions regarding investments in human capital as well as for efficient utilisation of the acquired human capital stock. Expenditure incurred for acquiring information relating to the labour market and other markets is also a source of human capital formation.