Author : Nilanjan Ghosh

Expert Speak Raisina Debates
Published on Jul 10, 2024

The importance of the notion of human capital and its estimation brings to the fore the importance of data in decision-making for a burgeoning human population and its well-being.

The value of human capital

This is part of the essay series: World Population Day 2024


The conceptual framework of neoclassical economics treats labour as a factor of production along with capital and other inputs (land, entrepreneurship, etc.). Interestingly, while capital is treated as a “stock” (i.e. a concept that delineates the quantity of a variable existing at a point in time, which may have been accumulated in the past), both production and labour are treated as “flow” concepts (i.e. a variable measured over a time interval). In other words, any production-related variable like the gross domestic product is defined in terms of the monetary value of the total produce in an economy in a particular year. At the same time, labour is measured in terms of the total time provided for the production that year. Capital, on the other hand, is measured as the value of the stock either at the beginning of the year or at the end of the year. 

Therefore, labour productivity is often measured concerning the average product value or the marginal product value that labour has created. The problem with this approach is that differential labour productivity across economies remains inexplicable—at times they have been attempted to be explained in terms of the spatially varying capital stock or other factor inputs, and at times to varying business environments prevailing across economies. In the process, traditional reductionist neoclassical economics fails to take into consideration the quality of labour by reducing labour into a numerical parameter measured in terms of time engagement. A correction was needed here. 

Labour productivity is often measured concerning the average product value or the marginal product value that labour has created. The problem with this approach is that differential labour productivity across economies remains inexplicable.

The corrective measure occurred with the emergence of the notion of human capital that delineates labour quality—this can adequately account for the varying productivity of labour across spaces even under conditions of the same units of capital stock and labour time. How do we delineate human capital? Human capital entails the knowledge, skill-set, and health accumulated throughout the life-cycle of the workforce, thereby rendering them the potential to be productive in the socio-economic system. Therefore, in many cases, the onus of creating a productive workforce lies with the government through investment in people through better nutrition, healthcare, quality education, skill enhancement, etc.—this creates the human capital base of an economy. 

Therefore, human capital is conceptually different from labour. From a sheer definitional perspective, the former qualifies as the quality of the workforce, while the latter is defined as the total human hours spent by a workforce in the production process. From an epistemological perspective, the difference lies in the fact that the former is a stock concept like capital stock, while the latter is a flow. 

From the perspective of the 2030 Development Agenda, SDGs 1-5 and 8 address all the human capital-oriented goals. Therefore, three clear developmental priorities are satisfied with addressing the critical human capital question. The question needs to be dealt with as a departure from the traditional neoclassical economic frameworks that deal with the supply side of the labour market with its own sets of hypothetical assumptions. This is embedded in the SDGs that inherently talk of the reconciliation of the three contesting verticals, namely, equity, efficiency, and sustainability. While neoclassical economics might appreciate the efficiency aspect, it does not explicitly endorse the same in its existing framework. However, SDGs, quite clearly and vociferously endorsed by the heterodox economic frameworks, explicitly bring in the efficiency argument while addressing and embellishing human capital. This has been explained earlier in this essay while discussing the varying human productivity across spaces, ceteris paribus. The equity dimension is quite clear here. Better skilling, health facilities, and education address the concerns of poverty, unemployment, and hunger with job and entrepreneurship creation. This brings in the dimension of sustainability of development even from an environmental perspective. In large parts of the Global South, it has often been contended that the poor’s overreliance on the natural ecosystem for their livelihoods has often led to their degradation—overexploitation has been antithetical to meeting conservation goals. Studies have also revealed that in certain parts of the underdeveloped world, the ecosystem dependency ratio (defined as the ratio of the value of the provisioning services provided by the natural ecosystem to the human community and the income of the community) is greater than the unity implying that the community derives more value from the goods and services provided by the ecosystem than from economic endeavours. Creating capacity through the embellishment of human capital is prone to reduce this ecosystem dependency ratio thereby helping the cause of environmental sustainability and conservation goals. 

The World Population Day 2024

The World Population Day theme is a clarion call towards appreciating the importance of data for a resilient and equitable future. There is no doubt that data is important for making some of the most critical decisions on human and planetary futures, by understanding the existing problems and adapting solutions for an inclusive and progressive society. This applies to human capital as well. There is an utmost need to understand the needs of the human population for making some of the crucial decisions for its well-being. 

It is important to take stock of the state of the human capital in an economy. While some may argue that data on the human development index might capture such a state, however, there needs to be a more nuanced approach to account for the returns on human capital and the changes over time. 

It is important to take stock of the state of the human capital in an economy. While some may argue that data on the human development index might capture such a state, however, there needs to be a more nuanced approach to account for the returns on human capital and the changes over time. 

The heterodox economic literature reveals three broad approaches to estimating human capital stock: the indicator approach, the cost approach, and the income approach. The indicator approach is delineated through an economy’s educational measures like school enrolment, average years of schooling, adult literacy, etc. The cost approach values investments in education-related human capital based on education spending. The income approach estimates the return on investment in terms of the incremental incomes generated due to current school enrolments through the net present value. The same sets may apply to health-induced human capital. In all cases, it is only data that can help in the process of understanding where human capital stands and what needs to be done to augment it. 

UNEP’s Inclusive Wealth Report 2023 which accounts for natural, human, and physical produced capital in economies across the world finds a global increase in human capital between 1990 and 2019. Despite its slower growth than produced or physical capital, human capital accumulation still constitutes the largest share of Inclusive Wealth (IW). While education, gender, and employment were treated as output variables in human capital calculations, health parameters were the input drivers, due to their forward causal relations with education and employment.

UNEP’s Inclusive Wealth Report 2023 which accounts for natural, human, and physical produced capital in economies across the world finds a global increase in human capital between 1990 and 2019.

The estimates show that for a majority of the economies, human capital has been driven by population growth, followed by educational improvements. While the shadow price of human capital and expected working years also contributed to this growth, their contributions are substantially low. Further, the largest increase in human capital has been recorded for the low-income economies, although high-income nations remain the ones with the largest share of human capital in the IW. This brings to the fore that the capital base of an economy should not be measured only through produced or manufactured capital, but human capital accounting is equally (if not more) important, along with natural capital accounting!

Conclusion

The importance of the notion of human capital and its estimation also brings to the fore the importance of data in decision-making for a burgeoning human population and its well-being. The concept of human capital reveals not only the potential of an economy to grow through a human capital-induced process but is also an indicator of overall economic resilience against systemic shocks. Data is the key to understanding that.


Nilanjan Ghosh is a Director at the Observer Research Foundation.

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