Human capital is defined as the knowledge, skills and competencies possessed by the labour market which is used to produce goods, services and ideas. Various attributes are embodied in human capital. For instance, a person’s education might be good but possess poor management skills. Human capital is therefore dimensional and should be looked at from the ability to adapt and respond efficiently to the customers’ needs. The labour market is currently changing from the full-time manual work to a flexible work environment. This raises the need for countries and organisations to ensure that their human capital is competitive.
Human capital has a direct impact on a country’s productivity, competitiveness and economic performance. There are various determinants of the competitiveness of human capital which include: the social upbringing, education level, the levels of discrimination, among others. The differences in the quality of goods and services produced are highly dependent on human capital. In addition, a worker’s general performance at the workplace which results from different factors such as creativity, innovation, job satisfaction, among others, is also dependent on human capital. The developed countries possess a common trait, significant attention to the quality of their human capital. In most cases, countries had to adopt strategies that are aimed at increasing the diversity of their human capital for them to realise a positive impact on their Gross Domestic Product (GDP). This study, therefore, recognises the importance of conducting more research on human capital and its effect on productivity, competitiveness and economic growth.
The Relationship between Human Capital, Productivity, Competitiveness and
Economic Growth
According to De (2011, p.133), the relationship between human capital and productivity can be well understood if viewed from the context of measuring productivity. By so doing, the connection can be evaluated from the context of home, organisation, society and country. The link between human capital and productivity in these settings exhibits direct proportionality between the two variables.
In the context of a home, human capital is highly valuable in many vital ways. The skills, knowledge and experience that people have are generally converted into significant output which takes the form of the improved value of the person during his or her life. For instance, a parent with competitive human capital who possess desirable wisdom, morals, culture, experience and knowledge, typically manage his or her home well and raise disciplined children and relate to his or her spouse wisely and respectfully. Such homes also have a positive influence on the society regarding their productive value (Shapiro 2006, p.377).
Human capital is highly valued in the context of organisations or workplaces. Most companies have realised the fact that they can earn a competitive advantage by developing their human capital, and ate hence incorporating all the available resources to do the same (Andrzejewski 2010, p.539). Organizations are increasingly adopting motivational strategies that are aimed at attracting and retaining employees that have the right mix of human capital. Companies even go to the extent of offering higher salaries to employees who have a competitive human capital mix in their rival companies as a way of ‘poaching’ them. Research has proved that the more competitive an organisation’s human capital is, the more the production, which translates into more profits (Andrzejewski 2010, p. 437). Organizations also invest in training their employees which pays off regarding competitive leadership as well as visionary and productive employees.
The combined home, society and organisational competitive productivity leads to a high overall national productivity. Scholars have confirmed that productivity is one of the critical determinants of economic growth (Engelbrecht 1997, p.1480). A right mix of human capital allows firms to produce high quality with the same quantity of resources which by extension leads to economic growth.
A study conducted by De (2011, p.37) examined the effects of a country’s literacy level on productivity. The research found out that education and productivity have a directly proportional relationship. The more educated a country is, the more competent the human capital is, and hence more productivity. His research included both formal and non-certified education, whereby its effects were significant on both micro and macroeconomic levels. There are various indicators of productivity that were considered as a result of increased education levels. These include value added per worker, the profits realised by the organisations and the probability of organisational survival in the market. A healthy and significant relationship was also established between education levels and GDP per capita income (Rodriguez Perez and Ordóñez 2003, p.138).
Del et al. (2002, p.44) claims that foundational skills have the most significant influence on productivity. The reason behind this claim is the fact that foundational skills generally for the basis for further studies and engagement in productive activities at the workplaces, hence determining human capital. However, foundational skills have been classified as the hardest skills to attain as an adult. There is, therefore, need for intervention to equip people with the skills during their earlier stages in life. The other factors which determine the competency of human capital are management leadership skills (Engelbrecht 1997, p.246). Organizations benefit from improved performance and high rates of innovation from employees who possess recommendable leadership and management skills. This, in turn, leads to improved productivity in the organisation.
The role of science and technology in today’s world has made the human capital investment to be one of the most critical factors that lead to increased national competitiveness (Tamura 2002, p.76). Human capital has been used as an accelerator of competitiveness in a contemporary economy where the globe has access to technology and modern operational methods. Human capital accumulation produces desirable externalities by which social returns on education are indisputably higher than individual returns. People acquire an education with the purpose of benefiting individually. However, what starts as a personal decision eventually benefits the general levels of society’s knowledge, which in turn facilitates the acquisition of knowledge by others.
The ties between higher education, scientific research and productivity are getting stronger (Tamura 2006, p.64). Economists have consistently confirmed that competitiveness and knowledge stimulate economic growth. This is the reason why all countries that aim at sustaining economic growth and competitiveness, in the long run, must pay undivided attention to the quality of their human capital. International competitiveness can be addressed in different ways. Firstly, it refers to the ability of enterprises and nations to manage the totality of their competencies with the aim of higher profits and prosperity (Lepak and Snell 1999, p. 79). Secondly, international competitiveness is a part of the economic discipline which seeks to analyse the policies and facts that determine the ability of a country to create and sustain an environment that leads to more value creation for its people (Rastogi 2000, p.68). It has also been defined as a collection of policies, factors and organisations that shape the level of prosperity and productivity of a country. One outstanding fact about the above-mentioned definitions is the fact that competitiveness is aimed at increased profits and productivity of a nation as well as its respective enterprises. Therefore, competitiveness is aimed at attaining a long-term economic growth. In addition, competitiveness requires policies that are aimed at developing the quality of human capital.
The role played by human capital in promoting the performance and competitiveness of an economically significant. A classical economist, Smith, claimed that the best way of sustainable economic growth is by ensuring a progressive increase in knowledge and educational development (Rastogi 2000, p.194). Accumulated skills and competency are essential factors that determine the economic growth of a country. Unlike physical capital, human capital is embodied in people and therefore grows through use and experience. Organizations must, therefore, give their employees quality platforms for them to exercise their knowledge as a way of increasing their experience and competency.
The demand for additional training is high among mid-life employees (Lepak and Snell 1999, p.106). However, it is worth noting that the demand for additional training is dependent on the acquired habits and opportunities provided earlier in life. Human capital development should, therefore, be directed towards the young generation, since if they are influenced early enough, then they will have the desire for additional learning and on-the-job-training. Since some skills decline with age and also diminishes if they are not put into use, it is essential for countries to establish a continuous human development system for them to remain competitive (Hitt et al. 2001, p.33).
Economic growth refers to an improvement in the ability of an economy to produce goods and services, compared to past periods of time (Mathur 1999, p.203). Mathur confirmed the fact that economic development is highly associated with human capital, productivity and competitiveness. This relationship can be measured by evaluating the number of resources that are invested in human capital development against the changes in the real gross domestic product (GDP). For instance, if a country decides to offer higher education to the people at subsidised costs, then the citizens are likely to acquire it, hence increasing their knowledge levels which in turn lead to higher productivity. People who have higher education earn more, which increases their disposable income which increases economic development through additional spending.
Organizations can help in increasing human capital and participate in economic growth as well. Economists have associated human capital development with the economic well-being of the nation (Savvides and Stengo 2008, p. 16). The most critical component of a nation’s wealth is increased human skills and competency. An individual’s investment in human capital can also be translated into national development when the information and skills are shared with others. In addition, human capital leads to the development of competitive resource allocation skills (Hitt et al. 2001, p.37). This ensures that a country’s resources are allocated and consumed in a way that leads to maximum value addition.
The more excellent skills acquired through improved human capital increases the mobility of workers into various industries. Their ability to adapt to new work environment increases due to the diversity of skills. This ensures that the labour market is ready to seize opportunities as they are presented, helping the country to re-allocate other resources towards more productive opportunities. Human capital also increases the ability of the labour market to embrace new technologies, which determines the productivity and competence of a nation. Such a labour market is also in a better position to acquire and apply foreign knowledge in local situations. In other words, human capital is the answer to innovation, increased productivity and economic growth (Rastogi 2000, p.63).
A Discussion on Whether the Market for Human Capital can be Made to Work Better
The World Bank and other agencies have recently been promoting policies that focus on the improvement of human capital (Asteriou and Agiomirgianakis 2001, p. 482). Most of the policies are aimed at the development of health, nutrition and education as a way of ensuring access to a healthy and well-educated workforce. It is clear that the developing world requires an increase in human capital for them to start and sustain value-added industries. According to the World Bank, research on human capital is complicated because its determinants are interconnected. For instance, education raises awareness on the need for healthy living. In addition, nutrition ensures a healthy people who are capable of absorbing skills and utilising them accordingly. The intervention on improving human capital is also difficult to measure because it takes longer to learn and the fact that learning is a continuous process that goes on even at the workplaces.
However, research has succeeded in confirming that a country can improve its economic conditions through improving its labour market (Lee and Mason 2010, p. 160). According to Lee and Mason, if a country can improve its health conditions to a level that leads to an increase in one year on its life expectancy, then it can attract a 4% increase in health spending, which translates into about 0.5% increase in GDP per capita income. Higher levels of education can also lead to improvements in technology adoption which translate into economic growth.
Human capital has contributed significantly to China’s economic growth. According to Jones and Schneider (2016, p. 88), 38.1% economic growth of China between 1978 and 2008 was due to human capital. The percentage is expected to be higher for the period between 1999 and 2008. This is because human capital improved significantly due to the significant educational expansion that took place during this period. Enrolment into higher education institutions increased approximately fivefold for the period between 1997 and 2007. Although the GDP changed slightly over this period since changes in human capital take time before they are translated into GDP increments since people learn through experience, the country’s productivity increased.
According to Yan and Yudong (2003, p.45), one of the primary drivers of China’s economic growth is the Chinese people. Its culture supports caring, ambitious and hardworking families, which is translated into overall improvements in its human capital. Yan and Yudong (2003, p. 51) confirm that there are at least forty Chinese phrases that encourage children as well as grownups to have big dreams and aspirations. As mentioned before, it is hard to change the character traits of an adult, unlike a child who masters certain attitudes and turns them into his or her way of life. The strategies that are aimed at improving the quality of the labour market should, therefore, include well-laid procedures of influencing the children to have big dreams for their future. The Chinese phrases which are known as “Chengyu” motivate the people to work hard and have faith that they will succeed in whatever they do.
The other contributing factor towards China’s improved human capital is the government’s emphasis on education. The PISA international student assessment ranked China as number one in both its 2009 and 2012 evaluations (Jones and Schneider 2016, p. 92). The Chinese higher education institutions graduate approximately 6-7 million college graduates each year, with 40% specialising in engineering and science courses. The Chinese engineers and scientists are the primary drivers of the country’s technological developments, which translates into economic growth. In fact, educated Chinese immigrants have become drivers of significant economies in the world, for instance, the American economy.
Another factor that has led to high-quality human capital markets in China is thrift. The country’s population records 25% personal saving rate, which ensures that the Chinese people rarely suffer from personal bankruptcies. The high saving rates lead to financial security for the Chinese population, hence having reduced government expenditures on social welfares. The funds that would have otherwise been spent on social welfares are spent on other developmental projects such as infrastructure (Lee and Mason 2010, p. 77). The true success driver of the Chinese economy is the investment in human capital which was significantly conducted between the 1950s and 1970s. This has led to the various economic developments, for instance, the glittering skylines and fancy airports in Shanghai and Beijing (Yan and Yunding 2003, p.25). Human capital development has paid the Chinese economy in the long run.
Conclusion
Human capital refers to the skills, knowledge and competency of the people which is used in the production of goods, services and ideas over a specified period. It is evident that human capital, productivity, competitiveness and economic growth are substantially related, whereby an increase in one of them is likely to lead to an increase in the others. This study has succeeded in proving that whenever the human capital is developed, people gain better skills and experience which makes them produce more quality with the same resources, hence increasing productivity. An increase in productivity due to better skills and knowledge is experienced in various contexts, that is, at home, society, companies and the country at large.
Likewise, investment in activities that improve human capital such as education and healthy living programs has a direct positive impact on a country’s competitiveness. It is important to note that globalisation has made it possible for most countries to have access to modern technology, meaning that technology in itself plays a smaller role in determining a country’s competitiveness. However, the ability of a country to earn a competitive advantage is determined by its human capital, which in turn determines how well the country adopts the new technology. This has a direct impact on its GDP, which determines its economic growth. China developed its human capital through ensuring affordable higher education to its people and adopting a culture that encourages children and adults to have big dreams in life. This, in turn, led to a positive effect on its economic development. Human capital development is more effective when conducted among the young generation, as a way of introducing an attitude of hard work and the need to achieve. Countries and organisations should, therefore, focus on improving their human capital as a way of attaining competitive advantage, increased productivity and overall economic development.
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