What factors contribute to human capital formation?

Human capital formation is an aggregate outcome of the investments in education, health, transport and communication sector, technical know-how and on-the-job training and migration. These factors are explained below.

(i) Education  

Education not only raises the standard and quality of living but also encourages modern attitudes of people. Education increases the acceptability of the modern techniques and also facilitates a primitive economy to break the shackles of tradition and backwardness. An investment in educational sector has two fold benefits. It not only increases the income earning capacity but also reduces the skewed distribution of income, thereby, forming an egalitarian society. The investment in educational sector has long lasting returns. It not only enhances the present economic condition but also improves the future prospects of a country. The importance of education is not only limited to making people educated but also in facilitating an underdeveloped economy to solve different but interrelated macro-economic problems like, poverty, income inequality, population, investments, under utilization of resources.  Therefore, investment in education must be accorded high priority in a country.  

(ii) Health  

There is a saying “The greatest wealth is health”. The wealth of a country can be increased with the efforts of healthy workforce. Investment in health sector increases efficiency, efficacy and productivity of a nation's workforce. In contrast to an unhealthy person, a healthy person can work better with more efficiency and, consequently, can contribute relatively more to the GDP of a country.  Good health and medical facilities not only increase the life expectancy but also improve quality and standard of living. Some of the common expenditures incurred in the health sector are on providing better medical facilities, easy availability of life savings drugs, common vaccination, spread of medical knowledge, provision of proper sanitation and clean drinking water, etc. Thus,  the expenditure incurred on health is important in the building and maintaining a productive work force.  

(iii) On-the-Job Training  

Training refers to the act of acquiring skills, knowledge and competency required to perform a particular job efficiently and effectively. On-the-job training is the most effective kind of training to a trainee, imparting him the technical skills and know-how at the actual work site. In this type of training, a trainee is assisted (or hands on) and trained by a trainer (usually by an experienced employee) when the trainee is actually doing the job. This helps the trainee not only to acquire the theoretical and practical skills simultaneously but also enables him to learn from the experiences of his trainer and, thereby, can increase his efficiency and productivity. This is the most common type of training programs because the returns in terms of increased productivity far exceed the cost of the training. Thus, the expenditures on such training improve the quality of human capital by enhancing its productivity, efficiency and income earning capacity.  

(iv) Migration  

Migration refers to the movement of people from underdeveloped or developing countries to developed countries in search of better avenues. Migrations contribute to human capital formation as it facilitates the utilization of inactive or underdeveloped skills of an individual. The cost of migration involves cost of transportation and cost of living at the migrated places. Usually, the cost of migration is very high due to the high cost of transportation and high cost of livelihood in the developed countries. Still, people migrate in search of better job opportunities and handsome salaries. Migration of human capital helps the underdeveloped countries to acquire technical skills, efforts reducing methods and efficient way of performing tasks. These skills and know-how are transmitted by the migrated people to their home country that not only add to the economic growth and development but also enhance the human capital of the home country.  

(v) Information  

The degree of availability of jobs, salaries and admissions related information also play an important role.

Human capital refers to stock of ‘skill and expertise’ embodied in humans. Factors contributing human capital formation are: expenditure on education; vocational training of Individuals; expenditure on increasing skill, health and nutrition level; proper allocation of resources and allowing migration to individuals for changes of jobs etc.
Education includes teaching training and learning especially in school and colleges to enhance the skills. To enhance the human resource different educational programmes have played a vital role in achieving milestones:

• Expansion of general education for primary and middle school education has increased the number of people with basic elementary education required in the country.
• Establishment of Kendriya and Navodaya vidyalaya have increased the level of secondary education in the country.
• Since independence more than 400 central, state government and private universities have been set up to enhance higher education in India.
• Vocational training programme by government and private institutions along with financial assistance has helped to develop better skills in human resource.
• Technical medical and agricultural education has played a vital role in enhancing better technologies and innovative methods for growth in their sectors.

There are various factors which contribute to human capital formation as discussed below: 

1. Education:

An educated individual has more knowledge and skills than an uneducated person. Hence, education imparts the neccessary attitude and aptitude for adopting new technologies and efficient management practices which help in raising productivity, education is an important factor in human capital formation. which leads to higher efficiency and productivity in human beings and thus highter income and standard of living which again facilitates further investment in education and health.

2. Health:

A sound mind in a sound body, like education, investment in health is also considered as an important factor for human capital formation as it directly increases the supply of healthy labour force. A healthy person is an asset for the nation as he is more productive than a sick person who is unable to work efficiently due to bad health.

Therefore, investment in health facilities to build a physically as well as mentally strong human capital is essential for increasing productivity. Preventive medicine (vaccination), curative medicine (medical intervention during illness), social medicine (spread of health literacy) and provision of clean drinking water and good sanitation are the various forms of health expenditures. Health expenditure thus is a source of human capital formation.

3. On the job training:

Firms provide on – the – job training to their workers to enhance their skills which helps in human capital formation. The workers may be trained in the firm itself under the supervision of a skilled worker or the workers may be sent for off-campus training, Expenditure regarding on – the job training is an important factor of human capital formation as the return of such expenditure in the form of enhanced labour productivity is more than the cost involved.

4. Migration:

It contributes to human capital formation as it facilitates utilisation of inactive skills of the people. People from rural areas, migrate to urban areas in search of employment. Technically qualified persons, like engineers and doctors, migrate to other countries because of higher earnings in such countries. Migration in both these cases involves cost of transport, higher cost of living in the migrated places and psychological costs of adapting to a new socio¬cultural setup. The increase in earnings in the new place outweighs the costs of migration. Hence, expenditure on migration is also a cause of human capital formation.

5. Information:

Information relating to the labour market and other markets is also a factor which contributes to human capital formation. Information regarding the level of salaries in various types of jobs, whether the educational institutions provide the required skills and at what is the associated cost is necessary to make decisions.

regarding investments in human capital as well as for efficient utilization of the acquired human capital stock Information is necessary to make decisions regarding investments in human capital.