The Issues Affecting Human Capital Economics Essay

This paper analyzes the interaction between the distribution of human capital and economic growing. It argues that the composing of human capital is an of import factor in the finding of the form of economic development.

The most of import type of capital is human capital for any state because no affair how much a physical capital a state possesses it is non of any good usage without human capital.

Human capital is a complex theoretical construct that is non defined in a unvarying mode. In its most general signifier, it refers to the resources in people. It has been defined by the OECD as:

“ The cognition, accomplishments, competencies and other properties embodied in persons that are relevant to economic activity ” .

This is a wide definition because it is non restricted to education but encompasses all investings in worlds which are made to better their accomplishments. These can include schooling and parental instruction every bit good as on-the-job preparation and learning-by-doing ( i.e. , geting accomplishments through work experience ) or other activities that help a individual put his or her accomplishments to productive usage. In add-on, merely like physical capital, human capital may deprecate ( as people forget what they have learned and as certain abilities deteriorate with age, for illustration ) or go disused.

An of import differentiation which should be made is between human capital and abstract technological cognition. Although human capital involves the acquisition of cognition, it differs in one regard from abstract cognition such as an innovation or a design. Human capital is a private good in that it is tied to a individual and is hence rival and excludable.

Issues impacting Human Capital:

Two issues originate in sing the consequence of human capital on economic growing:

How any relationship should is specified?

How should human capital be measured?

Main Objective of the Survey:

The chief aims of this survey is to gauge and analyse the effects of human capital as a flow variable on economic growing. The aim of the survey is merely limited to gauge the consequence of human function in Pakistan. The advantage of this survey is:

A more careful and in-depth scrutiny of institutional and historical features of Pakistan

The usage of informations set comprised of the most appropriate and highest quality steps unconstrained by the demand for measurement consistence in Pakistan

A more elaborate expounding of the dynamic development of the economic system.

Furthermore, a batch of work has been done for developed states ; a really small attending has been given to developing states. Therefore, the following survey adopts an alternate empirical scheme to look into the importance of human capital on economic growing by concentrating on developing state i.e. , Pakistan.

Therefore ; the chief aim of this survey is to gauge and analyse the effects of human capital as a flow variable on economic growing.

Economic Theory:

The ‘new growing theory ‘ has been extremely influential in explicating the differences in the economic public presentation of developing states. Economic retardation is extremely linked to low labour efficiency and preparation, lacking supplies of entrepreneurship and slow growing in cognition. The states that have surged in front, on the other manus, are characterized by high degree of human capital accretion where the educated labour force has raised the degree of end product and the rate of growing over a sustained period of clip. The new growing theory differs from the traditional neo-classical growing theory because it takes growing as an endogenous result of the economic system itself and non as a consequence of forces from outside the system. The new growing theory does non needfully presume that capital has decreasing rates of return. There can be, for case, outwardnesss to capital and/or human capital that give capital invariable ( or increasing ) rates of return.

Literature Reappraisal:

The thought that human capital plays an of import function in explicating income differences have been present in economic experts ‘ thought for a long clip. By some histories, it can even be traced to the work of Adam Smith and Alfred Marshall, although it was non until the center of the twentieth century that Gary Becker and others developed a theory of human capital. This theory, harmonizing to which a individual ‘s degree of instruction and experience find his or her ( labour ) income, was originally envisaged in a microeconomic context, but has later been applied to macroeconomics. Growth comptrollers such as Denison and Jorgenson/Guilloches examined to what extent alterations in the quality of the work force could explicate the “ residuary ” entire factor productiveness ( TFP ) unaccounted for by additions in labour and capital inputs.

Barro ( 1990 ) and Mankiw et Al. ( 1992 ) investigates the impact of the human capital degree on subsequent economic growing utilizing cross-country analysis. Barro finds that primary school registration rates have important explanatory power in the ( per capita ) end product arrested development, but the same registration steps for 1950 or 1970 have no prognostic value. Mankiw et Al. happen a important function of human capital measured by the secondary school registration rates, but find production to exhibit decreasing returns to physical and human capital inputs. The big proportion of empirical grounds on the consequence of human capital on growing are surveies that use informations on cross-section of states and seek to associate some initial degree of human capital with subsequent existent end product growing. In general, the consequences from the bing theoretical theoretical accounts suggest a positive impact of human capital on existent growing. However, the single empirical surveies, though they provide legion challenging findings, differ well on their anticipations, there is no consensus on the overall deductions of the consequences.

Uzawa ( 1965 ) and Rosen ( 1976 ) besides stress the importance of human capital in driving economic growing.

Nelson and Phelps ( 1966 ) said that the ability of state to follow and implement new engineering from abroad is map of its domestic human capital stock.

Recent theoretical accounts of economic growing such as Romer ( 1986 ) and Lucas ( 1998 ) stress that investing in human capital an of import factor part to economic growing. These theoretical accounts generate relentless growing endogenously from the actions of the persons in the economic system. An extra function for human capital may as engine for pulling other factors such as physical investing, which besides contribute measurably to per capita income growing. Recent experience with efforts to roll up physical capital at a rapid rate in hapless counties bears out the necessity of due attending to human capital because it has become apparent that the effectual usage of physical capital itself dependent on human capital. If there is underinvestment in human capital, the rate at which extra physical capital can be fruitfully utilised is limited since proficient, professional, and administrative people are needed for the effectual usage of physical capital.

Levine and Renelt ( 1992 ) , recommend a sensible grade of incredulity about illations from empirical surveies associating human capital to growing.

In the simplest preparation, growing rates are affected by thoughts and innovation, which in bend are related to the stock of human capital either through research and development

( R & A ; D ) activities or through acceptance behaviour. These preparations indicate non merely why the degree of end product is higher when a state has more human capital but besides why the growing rate is higher.

Previous probes of growing have concentrated on assorted steps of formal schooling activities as placeholders for relevant human capital. The most often employed step is either the primary- or secondary-school registration rate, used, for case, in Romer ( 1990 ) , Robert J. Barro ( 1990 ) , and N. Gregory Mankiw et Al. ( 1992 ) and highlighted in the influential sensitiveness surveies of Ross Levine and David Renelt ( 1992 ) and Levine and Sara J. Zervos ( 1993 ) . These schooling flow variables, nevertheless, will non accurately represent either the relevant stock of human capital of the labour force or even alterations in the stock during periods of educational and demographic passage. To cover with these jobs, Barro and Jong-Wha Lee ( 1993 ) pioneered the development of better schooling stock variables through the usage of single state study and nose count informations.

Stern ( 2001 ) argues that Education takes centre phase in any treatment of development scheme for two grounds. First, the measure and quality of instruction influences strongly the labour force, administration and the workings of most establishments. Thus it is a cardinal determiner of the investing clime. Firms, both domestic and foreign, are more eager to put when they know that they will be able to pull on a skilled work force to do that investing productive. Second, cosmopolitan entree to basic instruction is indispensable for guaranting that all sections of society will profit from macroeconomic growing.

Harmonizing to Fagerberg the chief decision from the huge field of catch-up and growing surveies is that catching up to leader states is non an easy undertaking, and merely states with appropriate economic, societal, and institutional features will win in it. One could add that the degree of human capital is of major importance.

All in all, human capital seems to play a decisive function in the public presentation of an economic system both, ‘cross sectionally ‘ and over clip. These empirical consequences motivate a closer expression at the growing theories in order to happen out what their accent on the topic is.

Model of the Survey:

As the aim stated is to gauge the function of human capital in economic growing in the underdeveloped state i.e. Pakistan.

We have considered growing accounting with human capital as a factor of production, so we employ the standard growing accounting methodological analysis with human capital specifies an aggregative production map in which Gross Domestic Product ( GDP ) Yt is the dependent variable, three input factors i.e. , employment Lt, physical capital Kt, and human capital Ht are the independent variables.

Model Specification:

The growing theoretical account used is:

Yt = At KtI± LtI? HtI? et ( 1 )

Where,

Yt= Gross Domestic Product

At = Exogenous degree of engineering.

Kt = Gross domestic investing ( a placeholder variable for physical capital ) .

Lt = Employment.

Ht= Schooling registration rate at secondary degree of instruction ( a placeholder of human capital )

et = Error term. Yt = At KtI± LtI? HtI? et

Premise sing specification of the theoretical account:

In this analysis it is assumed that rates of return on investing in human capital rise instead than worsen as stock of human capital additions, at least until the stock becomes big. So there are changeless return to scale in three consistent physical, labour and human capital stocks ( i.e. , I± + I? + I? = 1 or & gt ; 1 ) , the theoretical account generate ageless growings.

Data Collection:

The major beginning of this information is the Economic Survey of Pakistan ( 2005-06 ) . There are certain restrictions about the informations that are given as:

Many theoretical theoretical accounts of economic growing have used the schooling registration rates ( SERs ) as proxy variables for human capital. In this paper we besides use the schooling registration rates. Schooling enrolment ratios have several lacks as step of stock of human capital. First, the current enrolment ratios measures the flows of schooling, the accretion of these flows creates the future stocks of human capital. Because the educational procedure takes many old ages, the slowdown between flows and stock is really long. If the approximative slowdown is considered, so the building of human capital stocks still requires an estimation of initial stocks. Mistakes are introduced because of mortality and migration and because the net registration ratios are unavailable for developing states. The gross registration ratio introduces mistakes related to repeat of classs and dropouts, phenomena that are typically high in developing states.

“ Over short clip periods, there is small alteration in a state ‘s true mean schooling degree, so the ephemeral constituent of measuring mistake in schooling would be big comparative to variableness in the true alteration. Over longer periods, true instruction degrees are more likely to alter, increasing the signal relation to the noise in measured alterations. ”

An extra beginning of upward prejudice may be that the informations refer to the registered figure of pupils at the beginning of each school twelvemonth. The existent figure of kids that attend the school during the twelvemonth can be well lower. The mistake is peculiarly serious for developing states in which authorities punishes parents that do non register their kids at primary schools.

Methodology:

To gauge the growing model the methodological analysis that is used, is OLS method. The above stated theoretical account is stated as exponential theoretical account written as:

Yt = At KtI± LtI? HtI? et ( 1 )

Which may be expressed instead as:

Taking natural log of ( 1 ) , the relationship for growing can be expressed as

ln Yt = log At + I± ln Kt + I? ln Lt + I? Log Ht + ln et ( 2 )

ln Yt = a + I± ln Kt + I? ln Lt+ I? ln Ht + et ( 3 )

Where,

ln At = I±

ln et = et

Because of information restraints, so proxy variables are used relevant to growing accounting by those, which are straight discernible. For illustration:

Proxy variable for physical capital: Gross domestic investing rates used as a placeholder variable for physical capital.

Proxy variable for human capital: Schooling registration rates at secondary degree used as placeholder for human capital.

Our method of analysis is consisted of two parts:

First, we consider separate impacts of human capital and labour force on GDP: ln Yt = a + I± ln Kt + I? ln Lt+ I? ln Ht + et

Second, we combine a human capital step and employment to make effectual labour input. Because human capital embodied labour performs better than traditional employment in gauging possible end product growing.

So aggregative production map of ( 1 ) can be written in the undermentioned signifier:

Yt = At KtI± ( LtHt ) I? et ( 4 )

Taking natural log of ( 4 ) , we get:

ln Yt = ln At + I± ln Kt + I? ( ln Lt + ln Ht ) + ln et

ln Yt = a + I± ln Kt + I? ( ln Lt + ln Ht ) + et

Hypothesiss of Survey:

The growing accounting with human as a factor of production, we will gauge the standard growing accounting theoretical account. In the literature human capital is considered as the engine of growing. For illustration, Romer ( 1990 ) found that states with greater initial stock of human capital experience a more rapid rate of debut of goods and thereby to turn faster. Becker, Murphy, and Tamura ( 1990 ) , assume that the rate of return on human capital additions over some scope, an consequence that could originate because of the spillover benefits from human capital that Lucas ( 1988 ) stresses. As an illustration, the return to sort of ability, such as endowment in communications is higher if other people are more able. In this scene, addition in the measure of human capital per individual leads to higher rate of investing in human capital and hence to higher per capita growing. Therefore, we hypothesize those placeholders for human capital will consequence positively to the growing of Pakistan.

Empirical Analysis of Impact of Human Capital on Economic Growth:

The empirical estimations presented below provide penetrations into the relationship between steps of physical and human capital and growing. However, this arrested development should non be misinterpreted as causality trials: in peculiar, admit a significant feedback consequence from end product toward the input, as emphasized in the endogenous growing literature. These estimations are non simple correlativities because the input measures straight impact the production procedure so that the steps are related straight. Rather, view the grounds as bespeaking whether our human capital placeholders improve upon traditional growing measuring. Now the empirical consequences of empirical analysis are discussed below.

Effectss of Human Capital on Economic Growth as Measured by School Enrolment Ratess at Secondary Degree:

First of all we will gauge the equation that is:

ln Yt = a + I± ln Kt + I? ln Lt+ I? ln Ht + et

Where,

ln Yt= ln ( Gross Domestic Product )

ln At = ln ( Exogenous degree of engineering )

ln Kt = ln ( Gross domestic investing )

ln Lt = ln ( Employment )

ln Ht= ln ( Schooling registration rate at secondary degree of instruction )

ln At = I±

ln et = et

In this equation schooling enrolment rate at primary degree of instruction ( SERP ) is used as a placeholder variable for human capital. And arrested development is estimated by utilizing the Ordinary Least Squares ( OLS ) method.

By using the OLS method the undermentioned arrested development line is obtained:

ln Yt = -1.954 + 0.475 ln Kt + 0.121 ln Lt+ 0.401 ln Ht

The above estimated arrested development line shows the consequence of Gross Domestic Investment ( GDI ) , Employed Labor Fprce and the Registrations at the Secondary Education Level on the economic growing of Pakistan.

First analysing the consequence of GDI on the growing of Pakistan. We have analyzed its consequence by maintaining all the other factors i.e. Employed labour Force and the Registrations at the Secondary Education degree as changeless. The above estimated arrested development line reveals that the coefficient of GDI is positive and important. It means that addition in GDI leads to increase in economic growing.

Second, the coefficient of the Employed Labor Force besides shows that it has a important and positive impact on the growing of GDP i.e. addition in labour force which is used as index of human capital leads to increase in GDP.

Finally, analysing the consequence of the figure of Registrations. This besides reveals the positive and important impact on economic growing.

Sing the premise of the theoretical account it is noteworthy that for Pakistan there are changeless returns to scale ( i.e.I±+I?+I?=1 ) which implies that the theoretical account generates ageless growing.

The above consequences have proved that the state ‘s subsequent growing is positively related to the steps of human capital.

Effectss of Human Capital on Economic Growth as Proxied by Effective Labor:

Second we would gauge the equation as:

ln Yt = a + I± ln Kt + I? ( ln Lt + ln Ht ) + et

In the above equation as mentioned earlier we combine a human capital step and employment to make effectual labour input.

By using the OLS method the undermentioned line is obtained:

ln Yt = -2.181+ 0.479 ln Kt + 0.508 ( ln Lt + ln Ht )

The 2nd portion of the analysis we have combined employed labour force and the figure of registrations at the secondary degree of instruction to make effectual labour input. As it is obvious that human capital embodied labour performs better than natural labour. The consequences reveal that there is a important betterment in portion of effectual labour for gauging the human capital.

All the above consequences indicate that GDI, employed labour force and the registration at the secondary degree of instruction has a positive impact on the growing of the economic system of Pakistan. As we know that Pakistan is a underdeveloped state but with the promotion in the universe economic system the people of Pakistan are going aware of the present demands for the development of the economy.GDI in the state is increasing with the gait of clip and therefore increasing the employment chances. Education besides plays an of import function in the development of the economic system so the people are going aware of the importance of instruction. Parents compel their kids to derive more cognition and even the authorities is working for the advancement of this sector. Progress in this sector would take in the coevals of more skilled labour force therefore heightening the growing of the economic system. Furthermore, handling human capital as a factor of production implies that in growing accounting arrested developments, human capital affects positively and significantly to GDI and instruction degree to the growing rate.

Decision:

In this paper, an effort is made to find through empirical observation the function of human capital on economic growing. Economists use different analysis of the growing procedure where growing is an endogenous procedure bought by human capital accretion. In the analysis of this paper the impact if GDI, employed labour force and registration of the pupils at the secondary instruction degree is determined from 1990-2005.It revealed that all these factors positively and significantly enhances the growing of the economic system.

Our analysis shows that:

The bearer of human capital is human existences who are characterized as both productive and consumptive.

Human capital is a multidimensional construct which consists of different peculiar factors as employed labour force and the figure of registrations at the secondary instruction degree.

There is an overall positive relationship between human capital and economic growing.

Human capital stocks are positively related with the growing of GDI and in most instances are important for the underdeveloped states like Pakistan. It farther implies that the function of human capital as an agent in pulling physical capital can besides be proved. Evidences support that the endogenous growing theoretical account may besides enable greater investing in physical capital, which in bend generate growing. Overall empirical grounds supports the thought that human capital plays a important function in economic growing.

Policy Deductions:

The above analysis has the undermentioned policy deductions for Pakistan:

Greater attending should be given to the countries where the installations of instruction.

There is positive relationship between human capital steps particularly at secondary degree of instruction and economic growing. It means that if there is addition in human capital investing at this degree of instruction, it helps to increase economic growing. Therefore, the policy option should be to increase the investing in human capital for secondary and higher degrees of instruction.

Human capital embodied labour effects positively and significantly to economic growing, so the policy option should be that authorities has to increase investing in developing plans for labour and proficient instruction.

The one-year budget allotment for instruction in Pakistan is really low, so there is a demand to apportion a important sum of financess to instruction sector.

There may be hinderances to the free pick of profession. Racial favoritism and spiritual favoritism are still widespread in Pakistan. Such hinderances keep the investing in this signifier of human capital investing well below its optimum. The policy option should be to cut down such sort of hinderances in the procedure of growing.

Country develops if human capital is developed.

Productiveness in the economic system increases.

There is a remotion of societal and economic retardation.

It could convey an addition in the employment chances.

ANNEXURE 1 ( A ) :

The following tabular array contains the informations related to the GDP rate of Pakistan from the twelvemonth 1990-1991 to 2004-2005.It contains the natural log values of GDP harmonizing to the standards of the theoretical account mentioned above.

Old ages

GDP

ln GDP

1990-1991

5.6

1.7228

1991-1992

7.6

2.0281

1992-1993

2.2

0.7885

1993-1994

4.4

1.4816

1994-1995

5.1

1.6292

1995-1996

6.6

1.8871

1996-1997

1.7

0.5306

1997-1998

3.5

1.2528

1998-1999

4.2

1.4351

1999-2000

3.9

1.361

2000-2001

2

0.6931

2001-2002

3.1

1.1314

2002-2003

4.7

1.5476

2003-2004

5.7

1.7405

2004-2005

8.6

2.1518

Beginning: Pakistan Economic Survey 2005-2006

ANNEXURE 1 ( B ) :

The following tabular array contains the informations related to the Gross Domestin Investment ( GDI ) rate of Pakistan from the twelvemonth 1990-1991 to 2004-2005.It contains the natural log values of GDI harmonizing to the standards of the theoretical account mentioned above.

Old ages

GDI

ln GDI

1990-1991

19.4

2.9653

1991-1992

8.1

2.0919

1992-1993

13.8

2.6247

1993-1994

10

2.3026

1994-1995

13.4

2.5953

1995-1996

16.4

2.7973

1996-1997

8

2.0794

1997-1998

9

2.1972

1998-1999

-3.6

1999-2000

10.2

2.3224

2000-2001

8.6

2.1518

2001-2002

3.2

1.1632

2002-2003

10.7

2.3702

2003-2004

14.4

2.6672

2004-2005

27.5

3.3142

Beginning: Pakistan Economic Survey 2005-2006

ANNEXURE 1 ( C ) :

The following tabular array includes the informations related to the Employed Labor Force ( ELF ) and Enrollment in Secondary School ( ESS ) in Pakistan.

Old ages

Elf

ln

Elf

Einsteinium

ln

Einsteinium

ELF+ESS

ln ( ELF+ESS )

1990-1991

29.04

3.3687

90

4.4998

119.04

4.7795

1991-1992

30.07

3.4035

90

4.4998

120.07

4.7881

1992-1993

30.92

3.4314

93

4.5326

123.92

4.8196

1993-1994

31.68

3.4557

84

4.4308

115.68

4.7508

1994-1995

31.8

3.4595

86

4.4543

117.8

4.769

1995-1996

32.58

3.4837

86

4.4543

118.58

4.7756

1996-1997

34.59

3.5436

92

4.5218

126.59

4.841

1997-1998

36.36

3.5935

90

4.4998

126.36

4.8391

1998-1999

37.19

3.6160

75

4.3175

112.19

4.7202

1999-2000

36.72

3.6033

91

4.5109

127.72

4.8494

2000-2001

37.5

3.6243

83

4.4188

120.5

4.7916

2001-2002

39.64

3.6798

83

4.4188

122.64

4.8093

2002-2003

40.47

3.7006

94

4.5433

134.47

4.9013

2003-2004

42.24

3.7434

101

4.6151

143.24

4.9645

2004-2005

43.22

3.7663

104

4.6444

147.22

4.9919

Beginning: Pakistan Economic Survey 2005-2006

ANNEXURE 2:

This contains the tabular arraies of end product of the OLS arrested development line.

Table 2.1:

Effectss of Human Capital on Economic Growth as Measured by School Enrolment Ratess at Secondary Degree:

-1.954

11.249

-.174

.866

.475

.376

.483

1.265

.234

.121

1.326

.032

.091

.929

.401

3.151

.055

.127

.901

( Constant )

lnGDI

lnELF

lnESS

Model

Bacillus

Std. Mistake

Unstandardized

Coefficients

Beta

Standardized

Coefficients

T

Sig.

Table 2.2:

Effectss of Human Capital on Economic Growth as Proxied by Effective Labor:

-2.181

8.870

-.246

.810

.479

.271

.487

1.769

.105

.508

1.877

.074

.271

.792

( Constant )

lnGDI

lnELSESS

Model

Bacillus

Std. Mistake

Unstandardized

Coefficients

Beta

Standardized

Coefficients

T

Sig.

Mentions:

Jhingan, M.L. , The Economicss of Development and Planning.Delhi.38th edition.

Qaisar Abbas. , “ The Role of Human Capital in Economic Growth: A comparative survey of Pakistan and India. “ Pakistan Development Review.Vol 39:4Part II ( Winter2000 ) :451-473.

Website: & lt ; hypertext transfer protocol: //ideas.repec.org/s/pid/journal1.html & gt ; .

Website: & lt ; hypertext transfer protocol: //www.statpak.gov.pk & gt ; .

Website: & lt ; hhtp: //www.fao.org/docrep/x263eod.html & gt ; .

Website: & lt ; hypertext transfer protocol: //www.accountancy.com.pk & gt ; .

Pakistan Economic Survey 2008-2009.

Ishrat Husain. , “ Education, Employment and Economic Development in Pakistan. ”

S.Akbar Zaidi, Issues in Pakistan ‘s Economy. Pakistan: Oxford University Press.2nd edition.

Hanushek, Eric A. and Kim, Dongwook. “ Schooling, Labor force quality, and Economic Growth. ” National Bureau of Economic Research, December 1995.