What is the Role of Education in Human Capital Formation?

Education is a critical enabler of human capital development in the world, and it is disseminated through many mediums, including books and music, tutorials and training. Education and health are part of human capital – an individual’s skills, knowledge, and experience that possess economic value. It is mainly classified as an intangible asset that doesn’t appear on the firm's balance sheet. However, through employee training, education, and learning, employers can increase their human capital, which improves the firm’s profitability. There is a positive correlation between human capital and productivity and between human capital and economic growth. Human capital can also lose its value in the same manner as tangible assets if people remain idle, do not upgrade themselves, and get used to new technologies, mainly when they are out of work. Let us know more about human capital meaning, what is the role of education in human capital formation and more in today’s blog:

What is Human Capital?

One can define human capital as the personal attributes of individuals who contribute to the production process. These include knowledge, skills, expertise, good health, and education. An organisation's success largely depends on its people, from leadership to employees. This makes human capital a critical factor for companies. 

Human capital is generally managed by the Human Resources (HR) department, responsible for workforce acquisition, management, and development. HR also handles workforce planning, recruitment, employee training, development, and performance analysis.

Human capital and human development are closely linked. Investments in human development, such as improving education systems and healthcare infrastructure, directly contribute to building human capital. Similarly, a well-nurtured human capital base supports sustainable human development by driving economic growth, reducing poverty, and increasing access to opportunities. 

What is Human Capital Formation?

Human capital formation definition refers to the process of acquiring and increasing the stock of skilled, educated, and competent individuals within a country. It entails expenditure on personnel employment, training and development to improve the productivity and creativity of human capital. This is important for a nation's economic, organisational, social and political advancement, transforming people into assets that can champion the progress of a nation. Human capital is primary to the economic growth of a country. The importance of human capital formation is discussed below:

Technological Advancements

Human capital formation allows the acquisition and expansion of modern technologies. Through investments in education, organisations can build a workforce capable of handling modern tools and scientific methods, which can contribute to innovation and technological progress.

Improvement in Productivity

Investing in training and education enhances human capital productivity by equipping individuals with technical and professional skills. This results in higher-quality output and economic efficiency. Healthy and skilled individuals contribute to better performance and innovation.

Enhanced Quality of Life

Access to education, health, and skill development can improve the living standards of the people. Higher returns from these investments enable individuals to achieve a better quality of life and support economic growth.

Key Role in Development Strategy

Human capital has been central to India’s development strategies. This is especially true during the 1985–1990 Seventh Plan, where education and training were prioritised to drive economic growth and social transformation.

What is the Role of Education in Human Capital Formation?

Education is pivotal in shaping and expanding human capital by equipping individuals with the skills, knowledge, and opportunities necessary for personal and societal development. Below, we have explained what is the role of education in human capital formation in a tabular format:

What is the Role of Health in Human Capital Formation?

Health is crucial in building and enhancing human capital by influencing productivity, cognitive abilities, and overall social progress. The table below illustrates the key aspects of its impact:

Wrapping Up

Education helps us to achieve better economic growth and development by developing and maintaining human capital in the long run. Investing in an individual's health, education, and skills can improve the efficiency of an individual and society as a whole. Thus, when societies invest in human capital, they open the doors to more innovation, fewer inequalities, and long-term competitiveness in the global market. Therefore, organisations and nations should consequently understand and invest in their human capital to achieve workforce and national development goals. By embracing its potential, we can foster a competent and well-being population, which is critical for well-being and success in the long run.

FAQs

What is the role of education?

Education is an essential tool in developing people and societies as it forms and moulds them to accept certain cultures and norms, provides them with the relevant skills and knowledge to contribute to economic and social developments, and empowers individuals to engage in critical thinking on local and global issues and become responsible citizens.

What is the role of human capital formation?

The main focus of human capital development is increasing people's efficiency in a particular country. Thus, it is defined as the science that aims to enhance people's effectiveness and competencies and, consequently, the productivity of all sectors of the economy.

What is the importance of education?

Education gives life a firm ground, a stability that cannot be removed by any means. Education, especially college education, reduces career vulnerability and increases career opportunities. In addition to stability, education is the key to economic independence, particularly in the context of the modern labour market.

What are the primary sources of human capital formation?

Education, health, migration, and training are the chief sources of human capital accumulation. Education increases human capital and income per head, while health improves the value of people’s human capital. Migration allows individuals to access higher-paying jobs and better opportunities; on-the-job training is vital for increasing labour productivity.

Why is education essential for human capital formation?

Education is crucial for human capital formation, enabling individuals to acquire the competencies, skills, and knowledge necessary for productivity and economic growth. 

How does education impact an individual's earning potential?

Education greatly increases the level of remuneration since it provides the skills, certifications, and knowledge that employers seek. Education enables one to secure better-paying jobs, providing an opportunity to attain a better position in an organisation. It also fosters critical, analytical, communicational, and leadership abilities that improve career dimensions and can lead to better-paying jobs. 

How does education impact a nation's economic development?

Education boosts productivity and creativity, fostering innovation and entrepreneurial activity. It also drives technological advancements, contributing to increased output and overall economic growth.