Human Capital Formation

Human capital is the stock of skill, knowledge, health and experience embodied in a population that makes it economically productive. It is distinguished from the raw concept of "human resource" (which simply refers to the working-age people available) by the idea of investment: human capital is built up deliberately, over time, in much the same way physical capital (machines, buildings) is built up by investment.

Main sources of human capital formation:

• Education — the single most important source; schooling, vocational training and higher education raise a worker's productivity and lifetime earning capacity. This is the reason government spending on education is treated in economics as investment, not mere welfare spending.
• Health expenditure — a healthy workforce is more productive and misses fewer working days; spending on public health, nutrition and sanitation is human-capital investment exactly as schooling is.
• On-the-job training and skill development — vocational and technical training (ITIs, polytechnics, apprenticeships) that raises a worker's specific productive skill.
• Migration — movement of people (rural to urban, or across regions/countries) in search of better-paid, more productive employment is itself a form of human-capital-related investment, since it involves a cost (of moving, resettling) undertaken for a future return.
• Expenditure on information — the cost of acquiring information about job markets, further education and health services, which improves the efficiency with which people use their existing skills. …