Economics concepts and applications

Economics

Human Capital and Economic Growth

The concept of human capital is referred to in the field of economics, referring to the intangible characteristics of people which may be used to support or enhance their well being. The concept includes aspects such as the creativity, skills, knowledge and even personality traits such as charisma and al other personal competencies that have the potential to create some form of economic value. The most commonly used definition of human capital comes from the OECD where it is stated it is the "knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being" (OECD, 2001). An individual will have human capital, but the main use of the concept is when the individual levels of human capital are aggregated and the human capital is considered ion a broader scale, such as the human capital within a firm, or the human capital within a country.

A key issue with the concept of human capital is the way in which is can change, being increased as individuals gain more knowledge, skills and experience. A country may seek to increase the human capital by increasing educational provisions that are available; alternatively human capital may be increased with strategies such as encoring foreign direct investment (FDI) and seeking to gain from knowledge transfer. Likewise a firm may increase the human capital by undertaking trading and development strategies, such as formal training, mentoring and secondment; all of which increase skills and/or knowledge of their employees.

The general opinion is that the greater the human capital within a firm or country, the greater the value they may create in economic terms. An anecdotal consideration of the global economic climate reveals an apparent correlation between the economic position of a country and a level of human capital; rich nations with established educational systems have a higher level of human capital, whereas Third World and lesser developed countries have lower levels of human capital, and many strategies aimed at promoting economic development incorporate elements of increasing human capital, such as education.

There are two theoretical approaches which link improvements in human capital with improvements in terms of economic growth and labor productivity. The first theoretical approach is based on the work of Robert Solow, and the basic equation where the output of any nation is a function of the capital and labor which are present, and the influences that are made from technological advances. Solow demonstrates that improvements in productivity will drive economic growth, with a greater amount of output achieved with the same equivalent resources, and that improvements in productivity often achieved through advances in technology. Advances in technology are the result of human capital, with technology considered in a broader sense, not only in terms of information technology, but also mechanistic and process technology. Therefore, in Solow's model there is a direct link between increases in human capital and improvements in productivity and economic growth.