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Explain different sources of human capital formation.

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The main sources of human capital are :

1. Investment in education

2. Health expenditure

3. On-the-job-training

4. Information 

1. Investment on Education:

spending on education by individuals is similar to spending on capital goods by companies with the objectives of increasing future profits over a period of time likewise individuals general invest on education with the objective of increasing their future income.

Investments on education promote economic growth. It helps in creating more productive force and endouring with increasing knowledge and skills. It also helps in providing wide spread employment and income generating opportunities for the people.

2. Health Expenditure:

Health is an important input for the development of a nation It is also necessary for individual development. Who can work better? A sick person or a person with sound health? A sick labourer is compelled to abstain from work and this leads to loss of productivity.

Hence expenditure on health is an important source of human capital formation. Health expenditure directly increases the supply of healthy labour force and is, thus a source of human capital formation.

3. Expenditure resardins on-the-job-trainins:

On the job training is an arrangement where employees develop skills while they are working. This is beneficial for the employees and the organisation. It saves the organisation extra training costs and gives a working experience for the trainees.

Firms spend on giving on-the-job-training to their workers. This may take any one of the following forms: 

  • Training the workers in the firm itself under the supervision of a skilled worker.
  • Off-campus training

In both cases, firms incur some expenses. The firms will insist the workers work for a specific period of time after there on-the-job training. During that period the firm can recover the benefits of the enhanced productivity owing to the training. Expenditure regarding on-the-job-training is a source of human capital formations as the return of such expenditure in the form of enhanced labour productivity is more than the cost of it.

1. Expenditure on Migration:

People migrate from one place to another in search of jobs and enhanced salaries. The technically qualified persons like Doctors, Engineers, Managers, etc., migrater to other countries to get higher salaries. Hence expenditure on migration is a source of human capital formation.

2. Expenditure on information:

People have to spend to get information relating to the labour market, education and health.

Example:

People spend money to know the level of salaries offered to different types of jobs.

They spend money to know whether the educational institution provides the right of employable skills or not.

This information is necessary to make decisions regarding investments in human capital as well as for efficient utilisation of the acquired human capital stock. Thus, expenditure involved to acquire information relating to labour market, education and health is also a source of human capital formation.

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