Human Capital Formation: Meaning, Importance and Composition

In this article we will discuss about Human Capital Formation. After reading this article you will learn about: 1. Meaning of Human Capital Formation 2. Importance of Human Capital Formation 3. Composition.

Meaning Human Capital Formation:

The term human capital formation implies the development of abilities and skills among the population of the country. In order to transform the liability of the huge size of population into assets adoption of various measures for human capital formation is very much essential.

According to Harbison, the human capital formation indicates, “the process of acquiring and increasing the number of persons who have the skills, education and experience which are critical for the economic and the political development of the country. Human capital formation is thus associated with investment in man and his development as a creative and productive resource.”

In order to develop various sectors of the economy, a country should introduce manpower planning for the development of its human resources. Manpower planning indicates planning of human resources for meeting the development needs of the economy.

Just for proper utilisation of manpower resources, a country should impart proper education to its population and train its labour force in technology, engineering, management, medicine and in many other fields connected with the development of various sectors of the economy.

The most important factor in human capital formation is the development of top skills. As this skill formation is a time consuming process, thus the entire process of human resource development demands a long-term policy.

According to T.W. Schultz, there are five ways of developing human resources:

(i) Health facilities and services, broadly conceived to include all expenditure that affect the life expectancy, strength and stamina, and the vigour and vitality of the people;

(ii) In on-the-job training, including aid type apprenticeships organised by firms;

(iii) Formally organised education at the elementary, secondary and higher levels;

(iv) Study programmes for adults that are not organised by firms, including extension programmes notably in agriculture;

(v) Migration of individuals and families to adjust to changing job opportunities.

Moreover, we will have to include the import of technical assistance, expertise and consultants. According to Simon Kuznets, “The major capital stock of an industrially advanced nation is not its physical equipment; it is body of knowledge amassed from tested findings and discoveries of empirical science and the capacity and training of its population to use this knowledge effectively.”

Thus human capital formation indicates investment for imparting education, improvement of health and training of workers in specialised skills. Accordingly, Prof. Meier observed that, “Human capital formation is the process of acquiring and increasing the number of persons who have skills, education and experience which are critical for the economic and political development of a country.”

Importance of Human Capital Formation:

Although the accumulation of physical capital is quite important in the process of economic growth of a country but with the passage of time, it is being increasingly realised that the growth of tangible capital stock depends extensively on the human capital formation must get its due importance.

In the absence of adequate investment in human capital, utilisation of physical capital will be at low pace, leading to retardation of development.

Economists, like Harbison, Schultz, Kuznets, Kendrick and Denison observed that one of the important factors responsible for the rapid growth of the American economy is their increasing allocation of outlays on education resulting significant improvement in the level of human capital formation.

Prof. Galbraith observed, “We now get the larger part of our industrial growth not from more capital investment but from investment in men and improvements brought about by improved men.” Unless these developed economies spread education, knowledge, know-how and raise the level of skills and physical efficiency of their people, the productivity of physical capital would have been reduced at this moment.

Most of the underdeveloped countries are suffering from low rate of economic growth which is again partially resulted from lack of investment in human capital. These underdeveloped countries are facing mainly two basic problems. They lack critical skills very much needed for the industrial sector and again have a surplus labour force.

Thus human capital formation wants to solve these problems by creating necessary skills in man as a productive resource and also providing him gainful employment.

Human capital is, therefore, required “to staff new and expanding government services, to introduce new system of land use and new methods of agriculture, to develop new means of communication, to carry forward industrialisation and, to build the education system.

In other words, innovation or the process of change from static or traditional society requires very large doses of strategic human capital”.

In order to remove economic backwardness of the underdeveloped countries as well as to instill the capacities and motivations to progress, it is quite necessary to increase the level of knowledge and skills of the people.

Thus in the absence of proper development of the quality of the human factor, the underdeveloped countries will not be able to attain the desired rate of progress.

Composition of Human Investment:

The following are the components of human investment:

(i) Health and Nutrition:

As the poor health and undernourishment adversely affect the quality of manpower, the best way to improve the quality of manpower in underdeveloped countries is to provide adequate food and proper nourishment to people along with adequate health and sanitation facilities.

(ii) Education and Training:

The second composition of human capital formation is to provide education and training facility to the people in general. Investments made in education can accelerate economic growth. Proper utility of manpower depends on system of education, training and industrial experience of the people.

Prof. Singer has rightly observed, “Investment in education is not only highly productive but also yields increasing returns”. In order to raise the general living standards of the people, investment in human capital for making provision for education and training is very much required. Moreover adult education and training is also another integral part of manpower planning.

(iii) Housing Development:

The final component of human capital formation is the development of housing facilities for the people, which is an important determinant of human resource development. In underdeveloped countries special incentives for private house construction should be provided in order to provide healthy living conditions to the people. Moreover, steps must be taken to introduce subsidised housing schemes.