Sources of Human Capital Formation

To produce more human capital from resources, we need to invest in human capital. The process of adding to the stock of human capital over time is known as Human Capital Formation. In other words, Human capital formation is the process of acquiring and expanding the number of competent, educated, and experienced people who are essential to the country’s economic, social, and political development. Thus, human capital formation is associated with an investment in human beings and their development as a creative and productive resources.

For example, if at the beginning of the year, a country’s human capital stock includes 40 lakh skilled workers and at the end, it increases to 45 lakh skilled workers, then there is human capital formation to the extent of 5 lakh skilled workers in a year.

Sources of Human Capital Formation

Human capital of a country can be increased with the help of different ways. Some of the sources of human capital formation are as follows:

1. Expenditure on Education 

Proper utilisation of manpower depends completely on the education system and training of people. An educated person can earn more income than an uneducated person because the former’s labour skill is more than that of the latter. The economists believed that in order to accelerate the development process, it is essential to expand education opportunities among people. Besides, spending money on education by people is same as the companies spending money on capital goods. People invest in their education so they can increase their future income and raise their standard of living. Therefore, the most effective way to improve and enlarge the size of the nation’s productive workforce is to invest in education, as it turns human beings into human capital.

Countries and people spend money on education with the objective of: 

• Enhancing their potential earnings.
• Producing technological expertise and human resources that are ideal for boosting labour productivity and thus, supporting the rapid development of the economy.
• Getting better social standing and pride.
• Facilitating adaptation of new technologies.
• Improving their ability to make better life choices, and 
• Stimulating innovation.

2. Expenditure on Health

Complete physical, mental, and social well-being is a condition of being in good health. The quality of the manpower is negatively impacted by poor health and underemployment because sick workers who lack access to medical facilities are compelled to take time off of work, which reduces productivity. The quality of human capital improves when individuals have access to enough food and good nutrition, as well as adequate health and sanitation services. Therefore, a healthy person makes a more substantial GDP contribution than a sick person. 

The different forms of health expenditure consist of money spent on the following:

• Good sanitation facilities,
• Provision of clean drinking water,
• Social Medicine (Spread of health literacy),
• Curative Medicine (Medical intervention during illness), and
• Preventive Medicine (Vaccination).

3. On-the-Job Training 

As we already know that improvement in human capital automatically improves the productivity of physical capital. Therefore, many firms invest in on-the-job training for their employees. This training can be provided to the employees at a fast pace and without incurring much cost. This training helps in increasing the skill and efficiency of the employees, resulting in an increase in the production of goods and labour productivity. Besides, the employees can have updated knowledge of the latest changes in their field.

Thus, On-the-job training is an essential source of human capital formation as the return on investment in the form of increased labour productivity is greater than the cost. This can happen in several forms:

• Workers may be trained in the firm under the supervision of a qualified worker, or
• Workers can be sent off-campus for training.

Firms incur costs in each of these scenarios. Once the training is over, the firms require their workers to work for a set amount of time in order to enjoy the benefits of increased production. 

4. Expenditure on Migration 

People migrate in search of occupations that pay more than what they earn in their home places. For example, Engineers and physicians migrate to other countries in search of a higher salaried job. Unemployment is the driving force behind rural-urban migration in India. It means that unemployed people from rural areas move to urban areas in search of jobs. Similarly, technically qualified people like doctors, professors, engineers, etc., migrate to other countries in search of a job with a higher salary. In both cases, migration entails the expense of transportation, the greater cost of living in the migrated location, and the psychological costs of living in an unfamiliar socio-cultural setup.

5. Expenditure on Information 

People spend money to learn about the labour market and educational institutions. For example, people need information regarding different salary levels associated with different types of jobs, etc. This type of information is required to make decisions about education investment as well as to make optimal use of learned skills and help people to realise their productive potential. Thus, expenditure on acquiring information regarding labour markets and other sectors, such as education and health is a source of human capital formation.