Explain the role of human capital formation in economic growth.

Human capital is believed to be positively related to economic growth though, it is difficult to establish a relation of cause and effect from the growth of human capital to economic growth, but we can see that human capital formation is related to economic growth in the following manner:

(i) Higher Productivity’of Physical Capital Human capital increases productivity of physical capital as specialised and skilled workers can handle machines or techniques better than the unskilled workers, “increased productivity and hence production which leads to economic growth.

(ii) Innovative Skills Human capital facilitates innovation of new methods and techniques of production and this increase the rate of economic growth in the form of increase in GDP.

(iii) Higher Rate of Participation and Equality Human capital formation leads to a higher employment rate. With increase in employment, the productivity rises. Also, increase in employment opportunities also increases the level of income and this helps in reducing inequalities of wealth. Both, increase in employment rate and decrease in income inequalities are pointers of economic development.

Human capital formation is essential to the growth of the economy. Human capital formation increases the innovative capacity of the citizen, and as much of the modern economy and market structure is based on innovation this tendency in the citizen would fuel economic growth. The individual also tends to participate more in the economy as his knowledge base and health is widely enhanced. Human capital formation also involves advanced knowledge in the efficient use of technolgy, this would ensure that there is no waste (money as well as time based), thereby fuelling economic growth. Human capital formation and a knowledge based, healthy society has been proved to create exponential results in economic growth far exceeding the investments required to form such a capital base.