Human capital

Topic: Human Capital: Education, Health and Demographic Dividend · NCERT: Class 8, Ch 7 "Factors of Production"; Class 11, Ch 4 "Human Capital Formation in India"

Meaning

Human capital is the stock of skills, knowledge, abilities and good health that is built into people through spending on their education, training and health care. It decides the quality and efficiency of their work.

It matters because it raises labour productivity (output per worker or per hour), innovation (new ideas, products and methods) and earning capacity. It does this without adding more workers or machines. A country with the same population can produce far more if its people are better educated, trained and healthier.

Explanation

How it is built: from human resource to human capital

• Human resource means people seen as a resource, such as farmers, nurses, teachers and students.
• Investment turns this resource into capital.
• Money and effort go into schools, hospitals and training.
• People gain skills and better health.

• They become human capital, such as engineers and doctors.

• Human capital formation is this process of building up the stock of skilled, educated and healthy people over time.

• The physical-capital analogy (Class 11):
• A country turns land into factories. That creates physical capital (man-made means of production, such as machines and buildings).
• In the same way, it turns human resources into human capital.

• Key difference: human capital cannot be separated from its owner. A machine can be sold on its own. A doctor's skill cannot. It can only be used through the doctor's own work.

• "It takes human capital to make human capital":

• Only trained teachers and professors can train new doctors and engineers.
• So a shortage of good teachers today means a shortage of skilled workers tomorrow.

The three facilitators (Class 8)

• Education: it builds knowledge and cognitive development (the growth of thinking, learning and memory).
• Training: this is learning the skills needed for a particular job. Classroom learning gives theory. Training turns that theory into job-ready skill.

• Example: a civil-engineering student learns design in class. Then they visit sites, test materials and follow safety rules to learn how to build in a durable, cheap and eco-friendly way.

• Health:

• Healthy children attend school regularly and learn better.
• Healthy workers do more in less time and miss fewer days through illness.

• Stunting (being too short for one's age because of long-term poor nutrition) can limit thinking and physical ability for life.

• Work culture: human capital is not just degrees. Habits, discipline and a focus on quality also matter.

• Japan's kaizen ("continuous improvement") has been applied since the mid-1940s.
• Germany's culture of punctuality and attention to detail helped make it a leader in technology and manufacturing.

Why education pays: private and social returns

• Private gains:
• Higher earning capacity.
• Better social standing and better choices in life.

• Faster adoption of new technology.

• Social gains (spillovers):

• Society also gains through innovation, better health habits and informed citizens.

• Markets alone would therefore under-invest in education. This is the main reason for public spending on it.

• Intellectual roots:

• Adam Smith (1776): the "acquired and useful abilities" of a nation's people are part of its fixed capital.
• Alfred Marshall: education lets many people bring out their "latent abilities" (hidden talents).
• T.W. Schultz (1961): spending on skills is an investment, not just consumption.
• Gary Becker (1964): people weigh the costs of learning, such as fees and income given up, against higher future earnings. Firms weigh the cost of a machine against its returns in the same way.

Worked example: the return on human capital

• Formula: Labour productivity = Output ÷ Number of workers (or ÷ total hours worked)
• Before training: 10 tailors work 8 hours a day and stitch 400 shirts.
• Output per worker = 400 ÷ 10 = 40 shirts

• Output per hour = 400 ÷ (10 × 8) = 5 shirts per hour

• After a skill course: the same 10 tailors stitch 520 shirts in the same hours.

• Output per worker = 52 shirts. Output per hour = 6.5 shirts per hour.

• Productivity rises by (52 − 40) ÷ 40 = 30%.

• Lesson: labour hours stayed the same and no machine was added. The whole 30% gain came from human capital.

In India

• Measuring the stock: the World Bank Human Capital Index (HCI)
• The HCI is on a 0–1 scale and was launched in 2018 [2].
• It measures how much human capital a child born today can expect to reach by age 18, compared with a benchmark of complete education and full health [2].
• India's HCI = 0.49 (2020). The global average is 0.56 [2].
  • This means a child born in India will be only 49% as productive as they could be [2].
• India scores above the South Asia and lower-middle-income averages [2].

• Girls score 0.50 and boys 0.49 [2].

• Quality gap in schooling (LAYS)

• LAYS (Learning-adjusted Years of School) = EYS × (HTS ÷ 625)
  • EYS is Expected Years of School.
  • HTS is Harmonised Test Scores. 625 is the "advanced" benchmark.
• India: 11.1 × (399 ÷ 625) ≈ 7.1 years [2].
• So about 4 years of schooling are "lost" to poor learning.

• Learning poverty: 55% (2017) of Indian 10-year-olds could not read and understand a simple text [2].

• Health gap

• 35 out of 100 children under 5 were stunted (HCI 2020) [2].
• Government health spending was 1.0% of GDP (2017). The regional average was 2.0% and the income-group average was 2.8% [2].
• The Economic Survey 2020-21 recommended raising public health spending to 2.5–3% of GDP [5].

• The government's share in total health spending rose from 29.0% (FY15) to 48.0% (FY22), so people pay less out of pocket (from their own money at the time of treatment) [4].

• Education spending and policy

• The 6% of GDP target for education was first set in the NPE 1968. It was repeated in 1986 and reaffirmed in NEP 2020 [3].
• Actual public spending was 4.4% of GDP (2017-18) [3].

• NEP 2020 [3]:

  • It replaces 10+2 with a 5+3+3+4 structure (ages 3–18).
  • It targets a higher-education GER of 50% by 2035, up from 26.3% (2018). GER (Gross Enrolment Ratio) is total enrolment at a level as a percentage of the population of the official age group for that level.
  • It aims to expose at least 50% of learners to vocational education by 2025. Fewer than 5% of 19–24-year-olds received it in 2012–2017.
  • It makes a 4-year integrated B.Ed. the route into teaching, with 50 hours of professional development each year for teachers.

• Built but not used

• Only 48% (2018) of the working-age population was employed [2].
• Female labour force participation was 23% (2017) [2].

Don't confuse with

• Labour: this is the quantity of effort ("how much work?"). Human capital is the quality of that effort ("how skilled and efficient?"). Two workers can each give 8 hours of labour but carry very different human capital.
• Human resource: this means people seen simply as a resource. Human capital is what that resource becomes after investment in education, health and training.
• Physical capital: this is man-made means of production, such as machines and factories. It can be sold apart from its owner. Human capital cannot be separated from the person who holds it.
• Human Capital Index (HCI): this is the World Bank's measure of the human capital stock, on a 0–1 scale. It is not the concept itself. Do not mix it up with the UNDP's Human Development Index.

Prelims Hooks

• The three facilitators of human capital (Class 8) are education, training and health.
• Adam Smith (1776) called people's "acquired and useful abilities" part of fixed capital. The phrase "latent abilities" is Alfred Marshall's.
• Schultz (1961) wrote "Investment in Human Capital". Becker (1964) wrote Human Capital.
• The World Bank publishes the HCI (0–1 scale, launched 2018). India scored 0.49 (2020) against a global average of 0.56 [2]. Trap: girls (0.50) scored higher than boys (0.49) [2].
• LAYS = EYS × HTS/625. India had 11.1 expected years but only 7.1 learning-adjusted years [2].
• The 6% of GDP education target first came in the NPE 1968, not NEP 2020. NEP 2020 only reaffirmed it [3].

Mains Points

• Learning, not just enrolment: the gap between 11.1 expected and 7.1 learning-adjusted years, plus 55% learning poverty, shows India's problem is the quality of schooling [2]. Because "it takes human capital to make human capital", this makes the case for foundational literacy and numeracy and for NEP 2020's focus on teacher training [3].
• Health spending is an investment: 35% stunting and public health spending of about 1% of GDP (2017) hold back cognitive growth and productivity [2]. The Economic Survey's 2.5–3% target [5] and the rise in the government's share of health spending [4] should be seen as building human capital, not as welfare cost.
• Using the dividend: skills are wasted when only 48% (2018) of working-age people are employed and female labour force participation is 23% (2017) [2]. Education also has spillovers that markets under-fund, and the 6% of GDP target is still unmet at 4.4% (2017-18) [3]. This calls for more public spending, Centre–State coordination and policies that create jobs, especially for women.

Related concepts

• Human resource
• Skill
• Productivity
• Labour productivity
• Facilitators of human capital
• Continuous improvement

Read more

• People as a resource: from human resource to human capital