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Human Capital Formation

Last updated date: 16th May 2024
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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. 

The term human capital refers to the economic value of a person's skills and experience. It is said to include qualities like health and education.

Human capital is an intangible asset of a company that is not listed on the balance sheet. As all employers are not equal, companies can invest a sufficient amount to upgrade their skills leading to profits. They can invest in their training, education, and other relevant skills.

Human capital has a relationship with profitability, productivity and economic growth. Similar to other assets, it can depreciate due to unemployment if individuals won’t adopt new technologies. 

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 the human capital formation of a country.

Sources of Human Capital Formation

One of the most important investments during Human Capital Formation is made in education. Many factors affect human capital formation. Underneath are the factors affecting the 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.

6. Investment in Information

Information associated with health and education can be achieved by spending money. For instance, data with respect to salaries are prepared for different markets. 

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

An increase in population in developing nations can influence 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.

To learn more about what is human capital formation and other topics related to the +2 commerce stream, you can attend Vedantu’s online classes and study materials.

  • Brain Drain

Brain Drain refers to the migration of individuals from one place to another. It may happen from rural to urban areas or from one country to another. People migrate in search of better job opportunities, healthcare facilities, high salaries, etc. This can adversely affect the economic development of the nation. There can be loss of tax revenue, loss of capable future entrepreneurs, loss of innovative ideas, shortage of important and skilled workers, loss of country’s investment in health and education services. And most importantly, it can instigate a desire in other people to leave their home country.

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FAQs on Human Capital Formation

1. What is Human Capital in Economics? 

A collection of intangible resources that a group of individuals holds within a specified population is considered human capital. Human capital refers to the economic value of an individual’s skills and experience. It shows how much an individual is important for the economic development of the company or the country as a whole. The assets that are included in Human capital are education, training, skills, health, intelligence, and other soft skills like punctuality and loyalty. It is perceived to enhance productivity and thus, profitability. The more the company invests in its employees, the more productivity increases.

2. Define Capital Formation?

The term capital formation is used to express the total accumulation of capital of a country in an accounting period. The term refers to the addition of capital goods such as buildings, machinery, equipment, tools and vehicles. The final products are made by making use of the capital goods. Countries need capital goods to replace older ones that are used to produce services and goods. If the country doesn’t replace the goods, its production will decrease. If the capital formation of a country is higher, it develops good chances of increasing income. 

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

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

  • Increasing Population  - The rising population adversely affects the human capital in the developing countries. It decreases the per capita availability of existing resources. 

  • Excessive Poverty level  - A large number of people comes below the poverty line. These people don’t have access to basic amenities like health and education. The majority of these people can’t afford expensive medical treatment for major diseases and higher education. 

  • Increased Gender and Regional Inequality - Regional and gender inequalities decrease human development levels. 

4. Mention The Sources of Human Capital Formation. 

The sources of capital formation are:

  • Health Expenses - The health of an individual influences productivity. Unwell people can’t put their best efforts into the country’s development. 

  • Training - Many companies provide on-job training to increase labour productivity. This is an expensive source of income and the company bears large expenses for providing on-job training. Example- in house training, off-campus training. 

  • Educational Costs - The best way to improve the workforce is by investing in education. It is recognised as the foundation of human progress, therefore, both the government and parents spend more on education. 

  • Migration - Many people emigrate from India in search of better living standards, good job prospects and healthcare facilities. The increased income in the new places exceeds the value of migration. 

  • Payments made on gathering information

5. What are the differences between human capital and human development?

Human Capital- It considers health and education as a mode to increase labor productivity. This concept treats human beings as a way to get an end to higher productivity failing to which doesn’t consider the productive investment.

Human Development- It is based on the concept that education and health are integral parts of development only when the individual knows how to apply his knowledge to solve real-life problems. Humans can benefit themselves more if they have practical knowledge. Human development can be achieved through investments in education and health.