The Role of Human Capital in Economic Growth - Research Paper Example

?Ayman Lukata Todd Samuel MC-584 Human Resource Management November Human Capital The economic value that an employee provides to an employer iscalled human capital. This value is assessed in relation to a skill, knowledge, and experience each and every employee possesses. Formal education and participation in ongoing training factors related to the workplace setting also help enhance human capital that every employee represents. The increase in the economic value of man gave rise to the concept of human capital. Conceptualized by Mark Blaug forty five years ago, this is embedded in the economic theory of human resources in the form of human capital theory (Blaug, 1976:827). There have been many advances and breakthroughs since then in the field of human resource economics. Historically, human resource development (HRD) has referred to developing human resources in order to increase economic productivity and therefore a nation’s wealth that is, very closely linked with economic outputs. So, in the development context the meaning of the terms human resources development and human development are very much interconnected. Theories of human capital formation and human resource development have often been described as strong in analyzing the supply side in relation to its approach to manpower and planning and education (UN:1990). However, one man’s supply is another’s demand. In fact, human capital theory is basically demand-oriented but it views demand from the level of the individual. So this theory is now being applied, or has potential to be applied, to a number of areas of human resource analysis, where, previously a supply orientation tended to prevail. This new focus on the demand for human resource development may be one of the most important developments in the developing countries to emerge from economic theory of human resources. As UN’s Economic and Social Commission for Asia and the Pacific (UNESCAP) in its report pointed out, “The human capital revolution in the economics of human resources in last quarter century has had a major impact on policy-making and planning for human resource development in the developing countries. In many ways it may be said to have initiated interest in planning for human resource development. There can be little doubt that the impact of continuing developments in the economics of human resources will be equally potent source of new approaches to human resource development in the next twenty-five years”. As human capital is the work force behind economic growth, it is the position of this writer that support for the work force or labor, be given not only for the company’s gain but also for the advancement of the individual in terms of knowledge and skills in order to be able to keep up with the changing times and the demands that come with them. Several articles/works were read and taken into consideration in the making of this paper. Gary S. Becker, in his article “The Human Capital”, discussed education, training and health as the most important investments in human capital and the industry’s increasing reliance on them. Patrick Fitzsimons’ “Human capital theory and education” discussed the Human Capital Theory as the most influential economic theory of Western education, setting the framework of government policies since the early 1960's, and its recent reformulation which stressed the significance of education and training as the key to participation in the new global economy. F. John Reh’s article “New Employee Training - Is It Worth The Investment” presented arguments of training new employees in terms of its cost in the part of the employers and the gains that they will get from them. In Chapter 2 Historical Background- Higher Education Commission, a study on Human Resource Development by the Pakistan Research Repository – Higher Education Council discussed the definition of human resource development and the three essential capabilities for human development. It also discussed the recent advances in this field, and some significant new avenues for exploring approaches to human resource development (HRD), such as capacity development. The research entitled “Role of the Human Capital in economic Development- Some Myths and Realities” by UNESCAP discussed the factors which led to the exceptional economic development in some countries in Asia and the possible linkage of human capital with economic development. All these works gave the writer the idea and background information on human capital which enabled this writer to support her stand on empowerment of human capital in terms of education, training and skills development for the to be able to keep up to the demands of the changing times. Human capital, one of the basic factors of production, is essential in the operation of all types of businesses. Sourcing out and employing individuals who have the necessary expertise, judgment, and ability to function within their assigned roles allow businesses to operate at its maximum efficiency. In turn, this increases the potential of earning profits, and remaining successful and sustainable for many years. The failure to identify individuals with the necessary skills, experience, and education can undermine the efforts of an established company. The quality of the human capital determines organizational performance, thus, they are the key source of a company’s advantage. In today’s world where competition is prevalent and fought by taking advantage of advancements in technology and education, human capital with proper education and continuous training is an edge over similar firms. Competitive education, sufficient work experience and abilities of each employee are critical and have economic value for employers and for the economy as a whole. Human capital should not be treated as a commodity but an important labor and intellectual resource which contribute greatly to a country’s economy. In fact, the human capital theory is basically demand oriented but it view demand from the level of the individual (PRR-HEC: 1986). The fact that skill and knowledge is practiced or rendered by a human being elevates human capital to a level higher than being just a commodity. This being the case, plus the fact mentioned above about human capital, being the key source of a company’s competitive age, human capital advancement, development and welfare is a necessity. As Gary Becker stated in his article, “Schooling, a computer training course, expenditures on medical care, and lectures on the virtues of punctuality and honesty are also capital. That is because they raise earnings, improve health, or add to a person’s good habits over much of his lifetime. Therefore, economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets”. Continuing education for an employee will not only benefit him in terms of promotions and added self-confidence, it will also make them more open to positive changes and new developments in their workplace. And in their line of work and adaptability, this is an important factor for innovative change to have a positive result. This factor will also benefit the employer in terms of advantage in human intelligence and competence needed in the performance of the employee’s job but also gives them the added benefit of having staff that can be relied upon in terms of on the spot decision making. Continuous training makes an employee more adept and an expert in their specific field or assigned jobs. Businesses often make investments in human capital. Just as a company may invest in new technology to enhance its internal communication processes, the business can identify employees who demonstrate an aptitude for needed skills and arrange for those employees to receive professional instruction in new technologies and innovations in the workplace. Trained employees allow companies access to a wider skill set without the need to hire additional people. At the same time, the business helps to raise the economic value of each of those employees (Becker). The employee welfare in terms of healthcare should also be given emphasis since they constitute the work force that helps ensure continuous production and operation of a company. The continued operation and production translates to company earnings. Their physical and emotional states should always be taken into account for them to be contented, dedicated and loyal not only to the work that they do but also to their employers and the company in general. A firm which invests in capital also employs educated and skilled workers who are also healthy, then, not only will labor be productive, but it will also be able to use the capital and technology more efficiently (UNESCAP). Since the focus is on the individual’s capability alone, other aspects of the human capital outside the sphere or the coverage of his employment is not a consideration, hence, human capital can be treated as a commodity, as it was stated in an article “What is human capital”, “Human capital is a form of value that should be understood only in economic terms. Worth of this type does not include consideration of the value of the individual to the family, community, or other aspects of his or her social network. The focus is strictly on the skills, knowledge, and experience that the individual possesses, and how much those assets are worth to a given employer. For this reason, individuals should not base their total worth in terms of human capital alone”. The fundamental thing that growth accounting ignores is the costs of the resources already invested in the educational system and therefore the calculations tell us nothing about the net returns of spending on education. In this respect, Blaug (1987: 134) argues that “public expenditure on tertiary education depends not only on the costs of instruction but also on the volume of direct aid to students”. He further notes that the “levels of public spending on student aid can encourage or discourage the private demand for tertiary education but cannot directly affect levels of economic development or rates of growth of GNP per head”. Even within economic discourse, ‘investing’ in education, does not necessarily bring equity (Fitzsimons). Since education does not contribute greatly to GNP growth per head, educational background can be said to be of not that important when choosing an employee. What really matters is the capability of the employee to do tasks assigned to him. Instead of training employees for a job, companies will hire employees who are already capable of doing them. This will not cost them as much as training current employees. Even at the less than $1,500 per year for training an employee, it is still a cost. For some companies, especially those with traditionally high turnover, it can be a major expense. If your profit per employee is less than $1,500, it would be difficult to convince the stakeholders that training is justified. Besides, we all know it is the responsibility of the school system to train people to be workers. And it is the worker's responsibility to learn how to do a job so they can get hired (Reh). Added to that is the possibility of the employee leaving the company after sometime, to be able to look for other firms which can give him higher salaries for the knowledge and expertise that he possesses which his former company has spent a large amount to train him. This is why employers are reluctant to make big investments in terms of trainings and capability building for workers who might not stay long. Retaining skilled employees is an expensive action on the part of the employers. All those mentioned and discussed above, considering human capital as a commodity maybe true in some cases, but the fact that most employees stay long in the company they work for, shows that they get something in return, not only their wages but other benefits as well. The statement that the focus is strictly on the skills, knowledge, and experience that the individual possesses, and how much those assets are worth to a given employer is true. As UNESCAP stated in their study “It is the view of the author that, for human capital to spawn a perceptible impact on economic development, a nation needs to have a minimum captious mass of at least 70 per cent or more literate population. What this means is that if an overwhelmingly large number of people in a country are literate, even with simple basic education as being able to read newspapers, this may open up the minds of the masses, possibly make them more enlightened workers and perhaps institute some element of discipline in them”. But the skills, the knowledge and the experience, like a knife should be honed and sharpened from time to time. Like the knife, there comes a time when it becomes dull and cannot perform as well as it should. With the fast pace of change in terms of technology and its applications, it would be to the employer’s advantage to have an employee capable of keeping up with these developments. Added to that is the fact that employees who are aware that the company they work for are not only focused on earnings but also to their development and welfare, including those of his family are happy to stay with them because of loyalty and gratitude knowing that the company also has their best interest at heart. Conclusion Human capital is the collection of skills, knowledge, abilities and other attributes such as health and welfare, which are important in job performance to be able to produce economic value. It is the human being in the economic sense, acting in economic transactions or fulfilling the roles assigned to them, which may contribute to improving himself, his employers and the economy of a country as a whole. In order to be able to adapt and thrive in a fast changing world, with new technologies coming out almost every day, developing and strengthening skills and abilities is needed. The role of human capital in economic growth, development and productivity is linked to his development with regards to health, education and skills. These are the main reasons why companies and also the government should invest and allot subsidies for health and well-being of the human capital or labor, for their continued education and skills training. Works Cited Becker, Gary S. The Concise Encyclopaedia of Economics. Web. 29 October 2012. Fitzsimons, Patrick. Human Capital Theory and Education. Web. 29 October 2012. Pakistan Research Repository – Higher Education Council. Chapter 2 Historical Background. 1986. Web. 29 October 2012. Reh, F. John. New Employee Training – Is It Worth the Investment. Web. 29 October 2012. UNESCAP. Role Of Human Capital In Economic Development: Some Myths And Realities. Web. 29 October 2012. Wisegeek.com. What is Human Capital?. Web. 29 October 2012 Read More