Human Capital Formation - Sources & Problems

What Is Human Capital Formation?

One significant aspect that is responsible for the development of humans is knowledge. Knowledge in the form of education, learning and training can be achieved and shared from various means like books, music, tutorials, etc. 


It is quite evident that trades and businesses pioneered by skilled professionals will yield more productivity than initiated by an unskilled person. Consequently, the income made by a learned person is much more than by an untrained individual. All these earnings contribute to a nation’s economy and define human capital formation of a country.

Some Sources of Human Capital Formation


1. Expenditure on Education

By nourishing and enhancing the education system, a state’s workforce can be upgraded and improved. That is the reason why guardians and the government spend a vast amount behind education. Here are few purposes why the administration of a state or a country and parents invest so much on academics:

  • To enhance and develop their income in the upcoming times.

  • Strengthen human resources and improve their technical abilities. That, in turn, will help in enhancing the productivity of work and finally result in the expansion of the economy.

  • Educating individuals help in controlling the population hike of a country. If the birth rate decreases, sufficient resources can be provided to each studying individual.

  • By obtaining education and knowledge, one can further share it with other people. It is a social advantage.

By this, it is understandable that the role of education in human capital formation is a major one.


2. Training

A lot of organisations and companies present on-job training to enhance their employee productivity. This requires a massive amount of money and companies spend extensively in providing on-job training. Some examples are training under-skilled personnel, off-campus training programmes, in-house training and development, etc.


3. Investment in The Health sector

The very next source of capital formation is the medical and health care. For correct diagnosis and speedy recovery, people will always prefer going to the best healthcare units. Thus, it is necessary to build medical centres with all the required equipment and services to provide effective treatment. Some investments in health can be supplying drinking water that is safe and providing curative medicines, etc.


4. Expenditure on Information

Details and statistics related to healthcare and education can be acquired by providing money. Like, for example, facts and figures associated with remuneration and salary are produced for numerous markets.


5. Migration

To get better remuneration and salary, people migrate to other nations. Moreover, some people also look for better opportunities to build their career. Eventually, they shift from their native place to some other place. Rural-urban migration is one primary reason behind unemployment in India. Doctors, engineers and other qualified people migrate to different countries when they receive better opportunities. Shifting from one place to another includes travelling costs, living costs in the new location, etc. The hike in the pay scale in the migrated area is higher than the cost of shifting. Henceforth, expenditure on account of migration also acts as a source of human capital formation. 


Now, that human capital examples are discussed, various hazards affect its formation as well. Below are some of the problems:


Problems of Human Capital Formation

  • Population Growth

Increase in population in developing nations can influence the human capital formation. It reduces the per capita accessibility of the available resources. A massive headcount requires additional investments.

  • Long Duration

Human skill development involves a prolonged duration process. Enhancing and upgrading skills need more time. Hence, the activity process slows down considerably.

  • High Regional and Gender Inequality

Gender and regional disparity also hamper the development levels

  • Inadequate On-Job Training

On-job training related to the working of advanced tools and equipment is not provided to the workers in the agricultural field.

  • Rise in Poverty Levels

A large percentage of the Indian population falls under the poverty line. So, those people cannot even afford primary education and health services.


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FAQ (Frequently Asked Questions)

1. What is Human Capital in Economics? 

A collection of intangible resources that a group of individuals hold within a specified population is considered as human capital.

2. Define Capital Formation?

The term capital formation is used to express the total accumulation of capital of a country in an accounting period.

3. What Are The Problems of Human Capital Formation in India?

The primary problems that affect the formation of human capital are:

  • Increasing population

  • Excessive poverty level

  • Increased gender and regional inequality

4. Mention The Sources of Human Capital Formation. 

The sources of capital formation are:

  • Health expenses

  • Training

  • Educational costs

  • Migration

  • Payments made on gathering information