Human Capital Essay

In one sense, the distinction between the two is in level of aggregation. I’ll also shed light on how human capital stock is accumulated, and how it contributes to create economic value for the individuals, the employers (micro aspect) and their community (macro aspect), its externalities regarding economics as a whole. Education as prior investment in human capital will be looked into to explain how we get the needed skills to be productive for ourselves or our communities and how human capital pays off in terms of high productivity.

The paper will consider the existing pertinent university literature on five major areas which are: The micro and macro aspects of human capital, The investment of parents in education and other human capital of their children, The intergenerational transmission of inequality, The links between specialization in particular types of human capital and coordination costs, general knowledge, and the extent of the market, And the relations between human capital, population change, and economic growth, to sort out the various economic implications.

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It will also highlight the returns from Education and Training (Off and On Job) to the individual, the firm and the Economy in order to give a broad and exhaustive understanding of the topic chosen for this paper. These will help shed light on the topic’s issue from the fundamental information given by the pertinent existing university literature and their relevant principles which monitor economic growth through a perfect distribution of knowledge (rapid evolution of technology) and productivity. Economic growth and social cohesion are the aimed goals for every development policy through rationale and consequent investment.

They cannot be achieved or attained without prior investment in human capital and its amelioration year after year (food, health, education, and training). Education is the social route to economic growth. There is no human capital without education, training (off and on-the -Job,) and experiences. These procure skills which constitute human capital used to create economic value for individuals, the firms (micro level) or the economy as a whole (macro level. ) The skills or acquired knowledge enhance productivity for the welfare of individuals, the firms and the community what I’ll explain in detail later.

Human capital is aimed to achieve economic growth which results to greater social cohesion in a peaceful environment. Justification This paper is an essay on Human capital that covers five major areas as follow: Cicero and macro aspects of human capital; Investments by parents in the education and other human capital of their children; Intergenerational transmission of inequality; The links between specializations in particular types of human capital and coordination costs, general knowledge, and the extent of the market; The relation between human capital, population change and economic growth.

These five points give a broad view of the human capital concept and give maximum information in order to have a thorough understanding and an acceptable level of interpretation of the concept. This paper will demonstrate that learning of the course did take place and prove that I really understand the course in its various aspects. As a Doctoral student, this paper is a test to appreciate my capacity in reading, understanding and above all writing. It’ll also precise my capacity of transmission of what I learnt in a well organized manner and it’ll value my analysis skills as an economist.

Human capital, definition and origins I think the best way to start this paper, is to define the term human capital and precise its origins, to give readers the opportunity to first have an idea of what the paper is about. Definition of human capital Health, knowledge, motivation and skills, the attainment of which is regarded as an end in itself (irrespective of their income, potential) because they yield fulfillment and satisfaction to the possessor.

In an organizational context, human capital is the organization’s intellectual capital (competences, knowledge, and skills. ) This capital is the organization constantly renewable source of creativity and innovativeness (and imparts it the ability to change) but this is not reflected in the financial statements. Unlike structural capital, human capital is always owned by the individuals who have t and can Walk out the door’ unless it is recorded in a tangible form, or is incorporated in the organization’s procedures and structure (Source: Business Dictionary. This explains why it is said of human capital to be intangible and cannot be directly purchased or sold. It does not get much financial press. Origin of human capital Economist Theodore Schultz invented the term in sass’s to reflect the value of our human capacities. He believed human capital was like any other type of capital, it could be invested through education, training and enhance benefit that will lead an improvement in the quality and level of production. (www. Investigated. Com) Human capital and productivity Human capital is a large concept which covers multiple facets and different types of investment in human resources (HRS. ) Health and food constitute important aspect of that investment in developing countries, where the insufficiencies in these domains are open to limit severely the capacity to be engaged in productive activities. In this paper, I refer to human capital and productivity in the economy based on knowledge.

The fundamental aspect of human capital is knowledge, competences owned by the individuals and accumulated throughout schooling, training (off and on-job) experiences useful to goods, services and new skills production. These following fundamental components (see Angel De la Funnel and Antonio Concise, 2002) explain in depth the evidences shown above to define human capital and the determinant role education, training and experiences acquired by an individual play in the building- up of his human capital. The general competences relative to literacy (read and write. Literacy can be defined as an aptitude to extract information from written texts and other data recordings ND to encode the information on similar supports in an understandable and organized manner The specific competences are those connected to the functioning or operating of technologies or to particular production process. The specific technical knowledge refers to the mastery / control of the organized assets of knowledge and of specific analytical techniques which can be important for the production or technological progress.

Many people admit that human capital is an important determinant of productivity of individuals and the same at the aggregate level. Its function is particularly essential in today’s economy based on knowledge. I can deduce that workers with high aptitudes for problem solving and communication would better succeed than the less – qualified in their daily tasks. Individual with higher skills would better succeed than the less-qualified in their daily activities and will learn more easily and quickly.

The higher- qualified workers can easily operate on sophisticated technologies than the less-qualified and attain more productivity. They even help to increase the productivity of the less-qualified ones. This is easily understandable that they are more productive and contribute more to the economic growth. According to Funnel, A. ND Concise, A. (2002), (Lee capital human Dana nun economic Mondale base sure la consonance, pa,) one additional year in schooling represents approximately an increase of 6,5% through Europe and up to 9% in less regulated labor markets in the other member states of the Union.

They continue to say that in these countries, the wage scale is thought to reflect more closely the productivity. They precise that these also constitute a tight relation between the individuals’ wages, and the on-the-Job training which, yields up to 5% (micro aspect). The other aspect of the investment in training is that they do not only intricate to the amelioration of the wage scale of individual, they rather contribute to economic growth. I cannot omit to point out the essential role of Information and Communication Technologies (ACT) which is very determinant in productivity.

The other aspect is its competitively in the production process. I could easily remark that the growing function or role of human capital in today’s economy derives from the amelioration and the rapid diffusion of ‘CT. It can also be associated to the introduction of CIT in production process. It has generally contributed to the economy of knowledge. To have a very competitive and dynamic economy, European has chosen at Lisbon knowledge to conduct their economic process.

The reason is that they have foreseen that the rapid social mutation which dictates the economic process is a direct consequence of what we know and what we will learn is the only solution to respond to real needs in this complex economic environment. Skills, competences, experiences, expertise, globally known as human capital derive from knowledge. Here are some facilities offered to human capital by CIT towards the promotion of our economy: CIT implications are of high impact on the productivity cause it is about polythene technologies dotted with potential applications in various sectors.

They considerably contribute to enhance human capacity to stock information, to access and treat/handle them at low cost, Progress in CIT are open to be spread progressively useful sectors inspiriting or rousing a rapid technological and organizational evolution in the global economic process and are to contribute to accumulate the technical progress and its diffusion by providing to researchers new powerful tools and instantaneous access to information at an international level, CIT can increase competition on various arrests by giving to firms the possibility to look for clients and suppliers across the world etc.

From this point of view, it is clear to declare that human capital cannot be competitive in today’s complex economic environment without prior investment in knowledge as a whole, and in CIT or other technologies in particular. For Act’s impact on productivity is unique and is to be adopted to enhance the aggregate economic growth and social cohesion through the creation of more economic values. This justifies what Sansei, B. And Van Renee J. Wrote in 2000. ‘Human capital increases productivity and is main production function.

Micro and Macro aspects of human I’ll elucidate these aspects of human capital basing my analysis with a special reference to education, training (off and on-the Job) and experiences’ returns. The main reason to do so depends on the fact that the collective skills, knowledge or other intangible assets in individuals that can be used to create economic value for the individuals, their employers and their community derive from formal education and training as investment where returns are in the form of wage, salary, or other compensations. Formal education is generally admitted to be the basic and central element of human capital formation.

The essence of its growth (improvement, acquisition of new skills, experiences and expertise) is to be put at the credit of training (off and on-the Job. )This explains why it is said of education to be an investment in human capital that pays off in term of higher productivity, because it increases the capacity and the ability to produce goods and services or new skills in quality and quantity I’ll shed light and insist on the fact that it is not Just a device that individual use to signal their level of ability to the employer (Sansei, B. And Van Renee, J. 000) Although this aspect is the main determinant and evidence of their recruitment in the whole productivity (goods, services) process, the final goal (output) is the laity and quantity of productivity the individual as ‘human capital’ is capable to perform for the economic growth of the firm (micro aspect. ) The returns (wage, salary, compensation are normally measured and conceived of as private returns to the individuals but can also be social returns (economy as a whole: macro aspect), through the production function human capital is about. Micro aspects of human

To Jacob Minced, at the microeconomic level differences in human capital stock and in their growth can explain much of the observed variation in the wage structure and in the wage distribution among individuals and groups. Although pursued independently the applications view human capital and its growth as a cause of economic growth: of the economy as a whole in the theory of growth and of individuals in labor economics. I’ll elucidate the micro aspects of human capital through the returns from education and training to the individual and the firm.

To capture the advantages of training on a firm, I’ll try to highlight the impacts on firm radioactivity, profitability, and the long-term competitiveness. The Returns from Education to the Individual It is quite evident that the level of studies constitutes one of the major determinants of individual returns as far as education is considered as investment in human capital regarding the situation of the labor market. My decision to enroll with AAU in a Doctorate Program in Economics is an investment decision in my human capital to enhance my knowledge and other abilities in economics.

The targeted goal is to increase my future earnings as a professional. Two years after, I’ll be a Ph. Doctor in Economics. This qualification as a result of the course taken with AAU will help me to achieve more goals and attain a higher living standard (personal or individual return. ) It’ll contribute to enhance my abilities which will improve my skills as a consultant and ameliorate the quality of my works. The quality and quantity of my potential productivity will result to a position, hence change my professional and social status that can be expressed or converted financially and materially.

It’ll increase my income. At the other hand, this can lead me to another Job horizon at the international level (externalities). I’ll be more productive for myself and my firm by enhancing the quantity and quality of the services I’ll be asked to do. This can be interpreted as a way to contributing to the economic growth of my entity. I’ll detail this in the next section. As said above, one additional year of education increases the individual wage about 6, 5% (Funnel, A. And Concise, A. 002), trough Europe and up to 9% in States members with less regulated labor markets, where the salary scale is supposed to reflect more tightly the productivity . There exist a strong relation teens individual salaries and on-the -Job training, some estimates show that one additional year of training can increase the salary up to 5%. Empirical works examining the link between human capital and productivity point out that productivity with high human capital enhance productivity in the firm and are a direct source of innovation and competitively at long-term.

I have to remark that the link between human capital and individual salaries become tight considering the rapid technological evolution. Return to the Employer (Firm) In the previous section, I point out that additional training is subject to higher real ages. Here I’ll try to lay emphasis on what the employer expect by investing in his employee’s human capital. Three main reasons below compel the employer to decide such investment. They are: Being more productive, Being more competitive, And consequently more profitable firm in the future. (Blunder, R. Dreaded, L. Mightier, C. ND Sansei, B. 1999) An employer or a firm can afford real wage increases out of productivity gains. This means his or its productivity that is enhanced as result of prior investment in his employee’s human capital, that really contribute to the melioration of his business through the undergone investment (where he expects more productive and competitive status and gain more profit). A percentage of the acquired profit is retrieved to increase the wage. Some empirical studies estimate the direct training impact at 5%( productivity-enhancing), what I’ll highlight in the macro aspect.

For others, this is likely to be higher in case of firm-specific knowledge and skills that have little or no value once the worker “walks out the door”. The most important return to the firm is well schematic by Blunder, R. Dreaded, L. Mightier, C. ND Sansei, B. (1999) in these terms: “when labor mobility is effectively restricted, there may be productivity gains from training that are not passed on the employee in terms of wages but are only reflected in direct measures of competitiveness, productivity and profitability. I cannot give scientific or technical estimate on the return of education to firm due to the numerous difficulties existing and the lack of data on firm productivity, competitiveness and profitability. There is no firm which easily gives access to such vital information in a sense to avoid competition. The real turns on a firm can be analyzed through impacts on productivity, profitability, and long-term competitiveness. Impact on firm’s productivity Note that to enhance productivity; a firm should invest in the human capital of his work-force.

Because there exist a close link between productivity and training out of which comes the needed skills a firm requires for its growth. In today’s complex economic environment, we all know that knowledge is the principal vector of productivity-enhancing. A part from what we acquire from formal education which is of general knowledge, the need of specific skills (specialization) regarding the firm’s objectives or goals is capital. The national Institute of Economic and Social Research points out that the higher average levels of labor productivity in continental plants were closely related to the greater skills and knowledge of their work-force. Blunder, R. Dreaded, L. Mightier, C. And Sansei, B. 1999) In opposition, in UK we remark that the lower level of manpower skills was found to affect negatively labor productivity, the types of machinery chosen, the ways in which machinery was modified for the firm’s particular needs, the smooth running of machinery and the introduction of new technology. Blunder, R. Dreaded, L. Mightier, C. And Sansei, B. 1999) In UK they rather invest in machinery and new technology leaving aside the most important section that needs investment in today’s complex economic environment: human capital.

There is no productivity -enhancing without knowledge, skills, experiences and expertise. What proves that training does indeed have a positive impact on productivity. However a USA study shows that previous on- the-Job training increases a worker’s initial productivity by 9,5% but has no lasting effect. Previous off-the Job training has more long-lasting benefits and increases rent productivity by 16%. (Blunder, R. Dreaded, L. Mightier, C. And Sansei, B. 999) Impact on firm’s profitability It was shown and confirmed by few existing studies that investment in training remains profitable for firms, for the simple reason that not all productivity gains resulting from training are compensated trough a corresponding increase in individual remuneration. The positive impact on current productivity comes from the accumulation of general skills (formal education. ) At the end, we could easily remark that these higher wages do not affect the firm profitability. Blunder, R. Dreaded, L. Mightier, C. And Sansei, B. 999 wrote that on-the-Job employer-provided training sometimes generates considerable third-party externalities (benefits that are not appropriated by either the trainee or the trainer) when trainees do not stay with the employer who trained them. Formal off-the-Job training is found to generate substantial long-lasting externalities, while informal training appears to generate externalities only in first year of a worker’s tenure at a firm. Impact on Firm Long- Term Competitiveness To achieve long – term competitiveness, there is a need of a rapid and effective introduction of new technology.

This is not sufficient and efficient by itself. There must be highly-qualified technical staff that assists their managers. Thus, the available skills of a firm’s work-force contribute to the flexibility and the speed of the production process in order to meet the real goals of the firm. It also affects the type, variety and quality of the manufactured product. All these elements revealed by the pertinent University literature indicate that the proportion of technicians with appropriate qualifications have visible consequences for both new product innovation and adapting the production process to the advantage of developments in technology. Blunder, R. Dreaded, L. Mightier, C. And Sansei, B. 1999) Some empirical studies confirm that the adoption and use of high-level technologies in the firm and the extent of investment in worker training and the speed and successful adaptation of new technology is a source of innovation, hence, a long- term competitiveness strategy. Blunder, R. Dreaded, L. Mightier, C. And Sansei, B. (1999) believed that education and even previous informal training have been found to increase substantially a worker’s ability to be innovative on the Job.

Macro aspect of human To Jacob Minced, at the macroeconomic level, the social stock of human capital and its growth are central to the process of economic growth. Whilst at the micro level, it is about the degree of earning the individual attains in term of amelioration of his income which is said to be 6, 5%; the macro aspect is concerned by the productivity – enhancing which is estimated at 5% as a direct impact of one additional year of education or training. This results from the acquisition of new skills during the education or training period.

The acquired skills and competences catalyst the radioactivity and as a result, contributes to the economic growth through the amelioration of the production capacity. I’ll look at it through the returns to the Economy. Returns to the Economy I’ll elucidate this section by considering information synthesized on various points as follow: The Growth Accounting Model, The new Growth Literature, The Empirical Evidence, And the Indirect Contribution of Human Capital to Economic Growth. The high rate of private returns to education and training is a motivation for individuals to invest in their human capital.

I have to precise that the benefits of education and training are to limited only to the individuals. They could spillover to others as well so that the gains to the economy as a whole (the social return which is the main macro aspect of human capital) could exceed the returns obtained by the individual investing in his human capital (the private return which is the micro aspect of human capital. ) To explain or point out the macro aspect, I have to underline that all investment in human capital provide considerable gains for the economy as a whole and contribute to its growth.

The private return to the individual as owner of his human capital is oaken out of the general profit earned in percentage. Note that the efficiency of the productivity which generates the gains shared disproportionably is tributary to the knowledge, skills, experiences and expertise that derive from education or training. The social return to the economy as a whole (macro aspect of human capital) is a direct effect on productivity. To my point of view, it relies on the capacity and ability of individuals; promoters of economic growth and social cohesion.

This is confirmed by the pertinent university literature which reveals the existence of obvious benefits o society (basic level) from having educated and literate population, including increased participation in democratic institutions and social cohesion. It was also revealed that education and training may also provide positive production externalities, for example, it has been argued that educated individuals in a firm improve their own productivity as well as those of the less-well-educated individuals with whom they work.

According to Blunder, R. Dreaded, L. Mightier, C. And Sansei, B. (1999), the most direct evidence on education externalities comes from comparison of acre- and micro- estimates. The very few available estimates of the rate of return to education at the aggregate level do not, however, suggest that allowing for externalities effect adds very much to private rates of return based on earnings differences. From this, I can remark that the social return to the economy as a whole is very significant, and is a determinant in the economic growth.

I’ll elucidate the contribution of human capital to national economic growth at the macroeconomic level from theoretical and empirical works. This contribution has been the focus of both theoretical (the growth counting literature and the growth theories) and empirical research. Note that, the existing university literature does not distinguish between the Growth Accounting Model and the New Growth Literature. Because aggregate (or per capita) output growth is a function of the rate of growth of human capital in both the growth accounting model and the new growth literature.

The Growth Accounting Model Whether we call it ‘residual’, “technical change” or efficiency, the production of real income per capita growth that could not be attributed to growth in the quantity of capital and labor outputs, the various observed economic growth cannot be explained. The quality of the inputs, including human capital, in the growth process seems to be the essential topic on which several studies were focused. Note that there are two different arguments on the issue: Primitive works stated that the quality of inputs remain unchanged.

Actual studies claim to have shown that a significant proportion of the “residual factor” can be accounted for by substitution from lower-to higher quality input. (R. Dreaded, L. Mightier, C. And Sansei, B. (1999)) I can deduce from this that there are so many difficulties for these studies to define assure and compare skills and competencies and to establish the causality. Furthermore, it’s quite important to mention that only the empirical research provides significant information.