Education makes the most important contribution to human capital in an economy.
Kindergarteners learning to count are acquiring human capital, as are high-school students learning algebra, undergraduate students learning calculus, and experienced workers studying for an MBA. People also acquire human capital on the job—either as a result of explicit company training programs or simply because of practice and experience (sometimes called “learning by doing”).
The education policy of national governments therefore plays a big part in determining how much human capital there is in a country. In the United States and Europe, education is typically compulsory up to age 15 or 16. In other countries, the school-leaving age is lower: 10 in Bangladesh, 11 in Iran, and 13 in Honduras, for example. In still other countries, education is not compulsory at all. [***“At What Age…? Comparative Table,” Right to Education Project, accessed June 28, 2011,http://www.right-to-education.org/node/279.***] One of the aims of the American Competitiveness Initiative, mentioned at the beginning of this chapter, was to “provide American children with a strong foundation in math and science.”
There are many similarities between human capital and physical capital. Human capital, like physical capital, is accumulated through a process of investment. Basic education is an investment made by parents and governments. University education is an investment made by individuals and households. When you go to college, you give up time that you could have spent working or having fun. This is one cost of education. The other cost is the expense of tuition. The gain from education—the return on your investment—is that sometime in the future you will be more productive and earn more income. An individual decision to go to college is based on an evaluation of the costs (such as tuition and foregone time) and the benefits (such as higher salary after graduation and the joy of studying fascinating subjects like economics).
Firms also invest in human capital. They seek to increase the productivity of their workers by in-house training or by sending workers to external training courses. Large firms typically devote substantial resources to the training and development of their employees. Some of the skills that workers acquire are transferable to other firms if the worker moves to another job. For example, workers who have attended a training course on accounting would be able to use the knowledge they acquired from that course at many different firms. Other skills are specific to a particular firm (such as knowing exactly where to hit a particular machine with a hammer when it jams).
Human capital, like physical capital, can depreciate. People forget things that they learned, or their knowledge becomes obsolete. VisiCalc was once a leading spreadsheet software, so people skilled in its use had valuable human capital; yet knowledge of this program is of little use today. Human capital that is specific to a particular firm is particularly prone to depreciation because it becomes worthless if the worker leaves or if the firm goes out of business. One reason why factory closures—such as those in the food retailing sector in the United Kingdom—arouse such concern is that laid-off workers may see their useful human capital decline and end up with lower paying jobs as a result.
While there are similarities between physical and human capital, there are also differences. Most importantly, human capital is trapped inside people. Economists say that such skills are “embodied” in the labor force. You cannot sell the human capital that you own without selling your own labor time as well. The implication for government policy is that importing human capital means importing people. Dubai is trying to attract human capital—so it advertises the things that make the country attractive to individuals who own that human capital. Thus their website speaks of the “cosmopolitan lifestyle” in Dubai, together with the quality of the hospitals, schools, shops, and so on.
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