Theory of Human Capital

Theory of Human Capital

What’s Human Capital?
Human capital refers to the stock of competences, knowledge and personality attributes combined altogether to perform labour so as to produce economic value. It is the attributes gained by a worker through education and experience.

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Economists views on Human Capital
The set of skills possessed by the worker of the company Development of skills is an important factor in production activities Human capital model reveals that investment in education has a positive correlation with economic growth and development Economists regard education as both consumer and capital good
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What about research…
Adam Smith (1776), Jean Baptiste Say (1821), John Stuart Mill (1909), William Roscher (1878) and Henry Sidgwick (1901): were early contributors to the literature on human capital economics by suggesting in various ways that human beings are an investment which generates a return Many other early researchers recognized the concept but refused to consider people in the same way as physical commodities due to what has been termed “sentimentalism.”

Most recent survey…
Schultz (1960): the quality of the workforce was a variable element in the economy and could be improved to increase the human variable in the economic equation, and therefore increase productivity. Becker (1964): the investment in knowledge, skills and health would not only benefit the individual; it could also increase an employer’s or country’s human capital resource pool and potential productivity. Both were awarded the Nobel Prize in Economic Sciences
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Human Capital refers to…
Competence Knowledge

EDUCATION Investment Ability

Performance
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Education & Skills
Education increases the productivity and efficiency of workers by increasing the level of cognitive stock of economically productive human capability Human Capital is the concept that acquisition of more knowledge and skills raises the value of a person’s human capital, thereby increasing their employability, income potential and productivity.
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Periods…
Individuals live for two periods.
In the first period of their lives individuals devote their entire time for the acquisition of human capital. The acquired level of human capital increases if their time investment is supplemented with capital investment in education. In the second period of their lives, individuals supply their efficiency units of labor and allocate the resulting wage income, along with the interest income, between consumption and transfers to their children.

‘Forgone Earnings!’
Opportunity cost: The acquisition of human capital through education and training is an investment in the sense that the individual foregoes current income for increased earning potential in the future

Human Capial > Value

Human Capital Strategy

Sensitivity & Limits
Human capital theory clearly needed to be retooled since: average incomes have stagnated, unemployment rates have worsened and underemployment of highly schooled people has been recognized as a social problem.

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Underemployment
The biggest challenge to human capital theory is underemployment of credentialled* knowledge. Growing proportions of people who have invested many years of their lives in acquiring advanced formal educational qualifications are unable to obtain commensurate jobs. Thus creation of ‘new’ forms of underemployment: the credential gap and the performance gap.
* Show that someone has the ability to do something
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Underemployment Gap
The credential gap: difference between the formal educational qualifications of job entrants and the qualifications required by their employers. The performance gap : the difference between job holders’ knowledge and the actual knowledge needed to do the job.

Natural rate of unemployment
At the real wage rate W1 in the diagram above, E1 workers are employed. But the total labour force remains higher than the employed labour force. Thus the natural rate of unemployment = AB and consists of frictional + structural unemployment The government might cut the natural rate of unemployment by reducing the horizontal distance between the supply of labour curve and the labour force curve Any supply-side labour market policy that can increase the number of people willing and able to find employment in the labour market will shift SL to the right, this narrowing the gap These policies include measures designed to improve incentives to find and accept work and policies to boost the human capital of the workforce to improve the employability of the unemployed.

Retooling efforts
Three sorts of retooling efforts might be focus on: stressing the relative individual benefits of schooling, enhancing the quality of schooling, and emphasizing the benefits of lifelong learning.