HCF

Human Capital Formation

People become resources by using their skills, knowledge, productivity and abilities. When human resources is further developed b is further developed by becoming more educated and healthy, we call it 'Human Capital Formation.

MEANING OF HUMAN CAPITAL FORMATION (HCF):

Human Capital Formation refers to the development of abilities and skills among the population of the country.

• It is the process of acquiring and increasing the number of persons, who have the skills, education and experience.
• Human capital formation is associated with an investment in man and his development as creative and productive resources.

SOURCES OF HUMAN CAPITAL FORMATION

1. Expenditure on Education: Proper utility of manpower depends on the system of education and training of people.
   • Labour skill of an educated person is more than that of an uneducated person, which enables him to generate more income than the uneducated person. Economists have stressed the need for expanding educational opportunities in a nation as it accelerates the development process.
   • Spending on education by individuals is similar to spending on capital goods by companies. Individuals Education invest in education to increase their future income and raise their living standard.
   • Education contributes to economic growth because:

• Education confers higher earning capacity on people;
• It gives better social standing and pride; o
• It enables one to make better choices in life;
• It provides knowledge to understand the changes taking place in society;
• It also stimulates innovations;
• It facilitates adaptation of new technologies.

2. Expenditure on Health: Health expenditure is a source of human capital formation as it directly increases the supply of healthy labor force.
   • Poor health and undernourishment adversely affect the quality of manpower. Sick labor, without access to medical facilities, is compelled to abstain from work and there is a loss of productivity.
   • Therefore, expenditure on health is important to build and maintain a productive labor force and to improve the quality of life of people in society.
   • Adequate food and proper nourishment to people, along with adequate health and sanitation facilities leads to qualitative improvement in human capital.
   • Forms of Health Expenditure: The various forms of health expenditures include:
     • Preventive Medicine is known as vaccination;
     • Curative medicine, i.e. medical intervention during illness;
     • Social Medicine, i.e. spread of health literacy;
     • Provision of clean drinking water;
     • Good Sanitation facilities.
3. On-the-Job-Training: Productivity of physical capital is substantially enhanced with the improvement in human capital. Due to this reason, many firms provide on-the-job training to their workers.
   • Such training has the advantage that it can be provided fast and without much cost.
   • It increases the skill and efficiency of the workers and | the Employees' Provident Fund leads to an increase in production and productivity. Organization conducting
   • On-the-job-training may take different forms: Intensive training to enhance the skill sets of employees for
     • Workers may be trained in the firm itself under the desired performance supervision of a skilled worker;
     • Workers may be sent for off-campus training.
   • After on-the-job training of employees, firmly insists that the workers should work for a specific period so that they can recover the benefits of the enhanced productivity owing to the training.
   • It is a source of human capital formation as the return of expenditure on such training, the form of enhanced labor productivity, is more than the cost of it.
4. Expenditure on Migration: People migrate from one place to another in search of jobs that fetch them higher salaries.
   • Unemployed people from rural areas migrate to urban areas in search of jobs.
   • Technically qualified persons (like engineers, doctors, etc.) migrate to other countries because of the higher salaries that they may get in such countries.
   • Migration in both these cases involves two kinds of cost:
     • Cost of transportation from one place to another; and
     • Higher cost of living in the migrated places.
   • Expenditure on migration is a source of human capital formation as enhanced earnings in the migrated place are more than the increase in costs due to migration.
5. Expenditure on Information: Expenditure is incurred to acquire information relating to labor market and other markets.

• It involves amount spent on seeking information about educational institutions, their educational standards and the cost of education.
• For example, people want to know the level of salaries associated with various types of jobs, whether the educational institutions provide the right type of employable skills and at what cost.
• Information is necessary to make decisions regarding investments in human capital as well as for efficient utilization of the acquired human capital stock.