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CHAPTER III ECONOMICS OF HUMAN CAPITAL
The concept of human capital
Definitional Aspects
The notion of human capital widely referenced in development economics is seen as one the key factor of production in economic output and one of the most critical input for economic growth in modern economies. The concept generally refers to the “to the skills knowledge and capabilities of a workforce of a firm or of the population of the country as well as the organizational arrangements and networks of relationships those people have formed that enable them to be more innovative and productive” (Blair, 2011:50). In the economic literature the suggestion that the human factor is essential to production goes back to Adam Smith (1776) who pointed that investment to equip workers with special skills and capabilities are key to improving productivity. This provided the theoretical foundation for expenditures on human capital to be categorized as investment instead of consumption good. Later, Mincer (1958) Schultz (1961) Becker (1964) successively recognized the importance of human capital as capabilities and skills gained through investment in education which allow for higher private returns and differences in workers’ earnings. Coff (2002) designates human capital as the set of knowledge, skills and abilities which can be categorized as tacit or explicit and which refers to the extent of transferability of such knowhow (Crook, et al. 2011)
At a macroeconomic level the term was later coined by Becker (1993: 16) who put forward that the growth not explained by physical capital or quantity of labor is to be linked to residual factors of “labor quality” he later called – reluctantly – human capital. More recently and comprehensively the OECD (2001: 18) proposed a more extensive scope of individual attributes and has defined human capital “as the knowledge, skills, competencies and attributes embodied in individuals that facilitates the creation of personal social and economic wellbeing”. This definition represents a widening of the scope of human capital to not only traits but also to contextual and social elements. It also points to the multi – dimensions of human capital which can be “framed as heterogeneous and its value contingent on the context of its application – and these contexts vary widely from the national and firm level to the individual level” (2011: 187).
Categories of Human capital
Indeed, human capital is not a unidimensional construct. If it is the sum of knowledge and training skills embodied in an individual, it is for businesses the addition of capabilities which form a workforce while it represents for policy the capacity of the educated in a country. This translates into distinct intellectual capitals that have been categorized in human, relational and organizational types (Stewart, 1997). As Blair puts it human capital can be “framed as heterogeneous and its value contingent on the context of its application – and these contexts vary widely from the national and firm level to the individual” (2011: 187).
As an individual asset human capital is viewed as the antipode of physical capital. One important difference is that human capital is not alienable “its services can be rented but the capital itself remains the property of the original owner” (2011: 153). It refers here to knowledge embodied in individuals and acquired through formal education, learning and workplace training. But if human capital is viewed as a function of individual traits, its value in practice is predicated by the social environment which is the contextual element (Burt, 2005) to explain its different manifestations within the educated populace. Such link has been notably proposed by Coleman (1988) emphasizing the importance of the family environment in education outcomes. Blair (2011) later suggested that “social capital provide both the theory and evidence to illuminate the ways in which connections and relationships shape the development and realization of human potential” (2011: 79).
Human capital becomes defined as a relational resource, breaking away from “the reductionist neo –classical model of human capital in which individuals are presumed to invest on the basis of instrumental, self – maximizing motives” (2011: 78). The economistic view which implies human capital is invested in return for economic value is challenged in favour of an understanding of its wider social context (Schuller, et al., 2004; Erault and Hirsh, 2007). The shift towards a more social view of human capital also caused the OECD to provide a new and wider definition of human capital now seen as “the knowledge, competencies, skills, attributes embodied in in individuals that facilitate the creation of personal social and economic wellbeing” (OECD, 2001: 18).
If in an organizational context, human capital remains within the paradigm in which knowledge and skills are its main attributes embodied in an individual, for policy makers, human capital amounts to the capabilities of a country’s population and comprising a health factor which has come “to be seen as a fundamental component of human capital” (Blair, 2011: 79). Here the importance of human capital is derived from its collective significance as a key variable for the purpose of national planning and managing economic output. It evolves from an individual to a more social stance over time retaining its distinctive character from physical capital. The fundamental difference is “that human capital is not alienable. Human capital ownership cannot be alienated from its original owner. Its services can be rented but the capital itself remains the property of the original owner (Blair, 2011: 153) as it stands, unlike other forms of capital as an inalienable asset tied to the individual. Meanwhile this review of the multiple forms of human capital is also pertinent to the issue of categorizing and measuring human capital.
Metrics of Human capital
A host of proxies have been suggested in the labor economics literature to account for human capital. Attempts to provide for some estimate human capital were suggested on the onset in the early definitions (Schultz, 1961; Becker, 1965) which posited the sum of knowledge and skills of the population as a form capital instrumental to the supremacy of developed countries. Human capital is then measured through the education level of the population to which estimates are assigned such as literacy rate (Romer, 1990) or enrolment rates (Barro, 1991; Mankiw, et al., 1992) or average years of schooling (Barro and Sala-i-Martin, 1995; Benhabib and Spiegel, 1994).
Another thread of research has highlighted the occupational element as a measure of human capital that is the type of work performed instead of intellectual knowhow (Florida, et al., 2008).
Human capital: A Cost Center
These views are linked to the neoclassical approach which provided the basis for labor economists and policy planners to use as a measure of human capital, the inputs needed for its acquisition such as years of education, years of training. The neoclassical approach is further elaborated by Mankiv, Romer and Weil (1992) who suggest a “Cobb – Douglass production function with human capital as an H factor of the workforce.” (Blair, 2011:57). It follows that measuring human capital amounts more to measuring not its value but its cost through estimates of direct costs of education and training seen as investments and used by labor analysts to “… measure the economic effects of such investments in terms of wages salaries and other forms of compensation for workers” (Blair, 2011: 56).
At an organizational level, human capital is defined by the American Accounting Association (1973) as the “process of identifying and measuring data about human resources…” The focus is initially more towards quantifying human resources on the balance sheet treated as “expenses” and not “assets” (Brummett, et al., 1968).
Then new frameworks provided wider scopes to account for human capital (Boedker, 2007) not just in terms of outlays but relied on other human and performance dimensions (Kaplan, et al., 1992). Such approach included “…accounting for knowledge information, culture, values, skills, links to the community, practices to improve the environment, and customer service” (2011: 383). The emphasis is no longer on the financial accounting but rather on the wider delineation of human capital which accounts for more strategic elements such as “competitive advantage of human capital and organizational effectiveness (Blair, 2011: 384) not to mention its monetary value.
Human Capital: A Revenue Stream
A well – established strand of research has long provided evidence of economic returns at the individual level. From the pioneers (Schultz, 1961) who first described spending on education as an investment instead of consumption meant to develop workers ‘skills and improve their earnings potential, to Becker (1964) who also found knowledge to accumulate towards increased future income, all recognized the key role of education and improved skills to improved marginal productivity and improved workers’ earnings. Later Mincer (1974) determined the rate of earning for an additional one year in school to be 11.5%. Investments in education are seen as means to accrue monetary benefits and educational choices become “rational choices of optimizing agents, who compare the present value of earnings to be expected from education and its related costs, over a life-cycle period” (Blair, 2011: 76).
In more recent empirical studies, the higher productivity yield of human capital is also confirmed. Psacharopoulos and Patrinos (2002) conclude that in developing countries the average return to education is superior than that to financial capital. The OECD reports (2012) have shown across countries a strong positive association between private earnings and years of schooling.
If the accrual of human capital through education and training seems to be recognized throughout the literature as the main driver behind private returns it also has more encompassing effects at the macroeconomic level. Human capital affects not only individuals but also national growth.
Impact of Human Capital
The effect of human capital accumulation to explain the divergent economic fortunes among countries has long been established in development economics. Early on Adam Smith in The Wealth of Nations (1776) suggest the important role of human capital as a factor of higher productivity. The research has since overwhelmingly found strong associations between levels of human capital and economic prosperity.
CHAPTER I INTRODUCTION
1.1 Background to the Study
1.2 Aims of the study
1.3 Definition of key concepts
1.4 Rationale
1.5 Conceptual Framework
1.6 Problem Statement
1.7 Research Objectives
1.8 Research Questions .
1.9 Research Hypotheses
1.10 Data, Models and Methodologies
1.11 Significance of the Study.
CHAPTER II POLITICAL ECONOMY OF CORRUPTION
2.1 Introduction
2.2 Corruption: Short Genesis of a Long History
2.3 African Origins of Corruption
2.4 Definitional Issues
2.5 Determinants of corruption
2.6 Costs of Corruption
2.7 Conclusion
CHAPTER III ECONOMICS OF HUMAN CAPITAL
3.1 The concept of human capital
3.2 Metrics of Human capital
3.3 Impact of Human Capital
3.4 Human Capital in Developing countries
3.5 The Knowledge Economy Growth Model
3.6 Social Development and Human Capital
3.7 Conclusion
CHAPTER IV CONCEPTUAL FRAMEWORK
4.1 Introduction
4.2 Corruption and Human Dimensions
4.3 Corruption and economics
4.4 Corruption and governance
4.5 Conclusion
CHAPTER V METHODOLOGY
5.1 Introduction
5.2 Philosophical underpinnings
5.3 Study Approach
5.4 Data Description and Population
5.5 Data Source
5.6 Variables and Operationalization
5.7 Model Specification
5.8 Conclusion
CHAPTER VI EMPIRICAL FINDINGS
6.1 Introduction
6.2 Background
6.3 Data, Models and Methodologies
6.4 Panel Estimation Results
CHAPTER VII DISCUSSIONS AND CONCLUSION
7.1 Introduction
7.2 Thesis structure
7.3 Summary of Findings and Contribution
7.4 Contribution to Knowledge
7.5 Policy implications
7.6 Study Limitations and Further Research
7.7 Conclusion
APPENDICES
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