To produce more human capital from resources, we need to invest in human capital. The process of adding to the stock of human capital over time is known as Human Capital Formation. In other words, Human capital formation is the process of acquiring and expanding the number of competent, educated, and experienced people who are essential to the country’s economic, social, and political development. Thus, human capital formation is associated with an investment in human beings and their development as a creative and productive resources.
For example, if at the beginning of the year, a country’s human capital stock includes 40 lakh skilled workers and at the end, it increases to 45 lakh skilled workers, then there is human capital formation to the extent of 5 lakh skilled workers in a year. Despite its various advantages, human capital formation faces numerous problems.
Problems of Human Capital Formation
Some of the problems of human capital formation are as follows:
1. Insufficient Resources:
The resources required for the formation of human capital are much more than what’s available. Therefore, the facilities required for human capital formation have remained inadequate.
2. Brain Drain:
People move from one place to another to search for better job opportunities and high salaries than what they are getting at their present job. This migration of people results in the loss of quality people, such as engineers, doctors, etc., with high calibre. In developing countries, these people are already rare and their movement to other countries creates a problem. Also, the cost of losing quality human capital is high.
3. Serious Inefficiencies:
The capabilities of an educated person are either not getting used (because of unemployment) or are underutilised (because of underemployment), and a lot of society’s resources are getting wasted. Besides this, other inefficiencies like massive illiteracy, poor health and education facilities, non-education of many children, etc., are also creating a problem in human capital formation.
4. High Growth of Population:
As the population is continuously rising, it is adversely affecting the quality of human capital as it reduces the per head availability of facilities.
5. Weak Science and Technology:
In terms of education, the performance of human resources is quite unsatisfactory when it comes to science and modern technology development.
6. Lack of proper Manpower Planning:
There is no proper balance between the demand and supply of human resources in many places. This imbalance is common mostly to the demand and supply of highly skilled personnel. The lack of balance ultimately results in the wastage of resources.
7. Several Imbalances:
A huge percentage of the resources have been diverted towards higher education; however, such education is meant for a few people. Most people require primary and secondary education, and because of this, the economy’s general productivity is low.
8. Long Duration:
Developing the skills of human resources takes time as it involves a prolonged process. Therefore, the activity process slows down and fails to meet the demand for human capital at the right place and at the right time.
9. High Regional and Gender Inequality:
Besides other problems, human capital formation also faces the problem of regional and gender inequality making it difficult to produce more human capital.
10. Inadequate On-the-Job Training:
On-the-Job Training required by the farmers for the working of advanced tools and equipment is not provided to them in the agricultural field making it difficult for them to learn these tools. This ultimately slows down the process of human capital formation.
Last Updated : 04 May, 2023
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FAQs
Growth in population: The rapid rise of the population can influence the grade of human capital formation, mostly in developing countries. It degrades the per capita availability of the present facility. A large population involves extra investments.
What are the problem of human capital? ›
Growth in population: The rapid rise of the population can influence the grade of human capital formation, mostly in developing countries. It degrades the per capita availability of the present facility. A large population involves extra investments.
What is the criticism of human capital formation? ›
Another criticism is that the standard mainstream view of human capital theory is seen as narrowly focused on education and training, neglecting noncognitive development and the broader concept of human development .
What are the challenges of human capital theory? ›
Efficiency wage models challenge human capital theory not with respect to the connection between education and productivity but with respect to the connections between experience and productivity and between productivity and earnings.
What are the weaknesses of the human capital theory? ›
However, human capital theory fails the test of realism, due to weaknesses of method: use of a single theoretical lens and closed system modelling, inappropriate application of mathematical tools, and multi-variate analysis of interdependent variables.
What are the four issues that create a challenge for building human capital in government? ›
Our work has found human capital challenges across the government in four key areas: • Strategic human capital planning and organizational alignment, • Leadership continuity and succession planning, • Acquiring and developing staffs whose size, skills, and deployment meet agency needs, and • Creating results-oriented ...
Why is human capital risky? ›
This risk stems from a lack of hiring diligence and can decrease a company's retention rate, increase complacency, and taint the company's culture. In the worst case scenario, it can endanger other employees, management, and the firm. All of the above-mentioned factors lead to the primary human capital risk: turnover.
What does human capital formation lead to? ›
The formation of human capital raises production levels and leads to economic growth by adding to the GDP. Knowledgeable and skilled workers can make better use of resources at their disposal.
What is the main difference between human capital and human capital formation? ›
(i)The people of a country are known as Human capital. (ii) It may or may not contribute significantly to the economy of the nation. (i) Healthy and educated human population is known as Human capital formation. (ii) It contributes significantly to the economy of the nation.
How does human capital cause inequality? ›
The human capital model suggests that the level and distribution of schooling across the population determines the distribution of earnings (Becker and Chiswick 1966; Mincer 1974). Hence, the model predicts that the supply and demand of educated people influence the earnings inequality in a society.
Human capital refers to the knowledge, skill sets, and experience that workers have in an economy. The skills provide economic value since a knowledgeable workforce can lead to increased productivity. The concept of human capital is the realization that not everyone has the same skill sets or knowledge.
What are the four factors of human capital? ›
These factors are explained below.
- i. Education. Education not only raises the standard and quality of living but also encourages modern attitudes of people. ...
- ii. Health. There is a saying “The greatest wealth is health”. ...
- iii. On-the-Job Training. ...
- iv. Migration. ...
- v. Information.
Human capital theory rests on the assumption that formal education is highly is highly instrumental and necessary to improve the productive capacity of a population. In short, human capital theorists argue that an educated population is a productive population.
Is the human capital theory a good theory? ›
The human capital theory has both pros and cons. Some of the benefits attributed to this theory include: Increased economic performance - According to research, higher GDP is linked to higher levels of human capital. As a result of increased education and training, employees are more effective at their jobs.
What is the human capital inequality? ›
Human capital inequality can be thought of as measuring disparity in the ownership of labor factors of production, which are usually compensated in the form of wage income. Earnings inequality is tightly related to human capital inequality.
How does human capital affect the environment? ›
It was found that (1) educational human capital, with a three-period lag, and healthy human capital significantly promotes green technology innovation; (2) command-and-control environmental regulations, with a one-period lag, and market-incentivized environmental regulations promote green technology innovation, while ...
What are the three factors of human capital? ›
In Economics, human capital refers to the level of health, education, training, and skill of workers. It is one of the primary determinants of the productivity and efficiency of labor, which is one of the four main factors of production.
