Contribution of Education and Training to Economy - Essay Example

?HUMAN CAPITAL EXPLANATION OF THE CONTRIBUTION OF EDUCATION AND TRAINING IN THE ECONOMY Human Capital Explanation of the Contribution of Education and Training in the Economy There has been consensus across board that education and training are critical to economy of any given country. Most people agree that education and training contributes in various ways to the economic growth and development. There are numerous explanations to this argument, all of which point out to the same proposition of education and training contribution in the economy. Human capital explanation is one such explanation; it states that education and training has sizeable impact to the individuals, organizations, and the overall economy (Blundell, Dearden, Meghir and Sianesi, 1999, p. 3). In general, human capital explanation takes in stock the personality attributes, knowledge, and competencies that are embedded in the people’s capabilities to perform labour that ultimately results to economic value production. Human capital explanation suggests that education and training increases people’s productivity by imparting useful values, skills, and knowledge thereby raising their income and facilitating the functioning of economic structures (Burton- Jones and Spender, 2011, p. 32). It should be noted that human capital is itself a product of education and training coupled with other aspects such as experience and discipline. Haldar and Mallik (2010, p. 9) observes that numerous studies that have extensively explored on how education and training impact the economy have shown that they significantly contribute to overall output generation in economy. In the context of human capital, education and training are viewed as investments which enable individuals of a particular society to be equipped with skills and knowledge that improve their productive capacities and employability eventually leading to higher earnings. At the aggregate level, human capital explanation stipulate that education and training contribute significantly to the economy through its impact on productivity growth and domestic output (Burton- Jones and Spender, 2011, p. 40). It is in the light of this, that this essay seeks to explain the human capital explanation of the contribution of education and training in the economy. Additionally, the essay discusses the role that the government should play in support of post compulsory education and training so as to provide the incentive structure to individuals and firms. Burton- Jones and Spender (2011, p. 40) note that the human capital explanation has three main components that are critical in understanding the contribution of education and training in the economy. These components include: knowledge and qualifications gained through formal education; competencies, expertise, and skills obtained through training on a specific job; and innate or acquired ability. According to Becker (2004, p. 11), the human capital explanation is founded on the recognition that the decisions of individuals and firms to invest in human capital is the same to that decisions concerning other types of investments that individuals and firms undertake. As such human capital concept view education and training as human capital investments that involve initial costs such as forgone earnings while an individual is at school, training course fees, and tuition fees among other initial costs that an individual hopes to make returns in the future such as through higher firm productivity or increased earnings. Haldar & Mallik (2010, p. 22) argue that just like physical capital investments, human capital investments will be undertaken by individuals or firms that aim at maximizing wealth if the return that is expected from the investments is higher than interest’s market rate. So, how does the human capital concept explain the contribution of education and training in the economy? According to Blundell, Dearden, Meghir and Sianesi (1999, p. 20), human capital has three explanations regarding the contribution of education and training in the economy, namely; contribution to individuals, contribution to firms, and contribution to the economy. In regard to contribution to individuals, the argue that the human capital accumulation, in the standard economic model, is viewed as an investment decision where individuals give up certain proportion of their income in order to undertake education or training so that in return they increase their earnings in the future. The model states that individuals will only invest in their human capital if the costs of the investments are compensated by future earnings that are highly sufficient (Keeley, 2007, p. 39). Ability to command higher earnings in a competitive labour market where wages are reflection of an individual worker’s marginal product, one needs to be more trained and better- educated. However, it should be noted that in the presence of barriers to entry into various occupations or imperfect competition, wage differentials between more- trained and better- educated may not really relate to productivity differentials (Haldar & Mallik, 2010, p. 24). In addition, human capital explanation stipulates that education and training makes contribution to firms or employers. Pineda and Rodriguez (2006, p. 177) argue that in most cases, firms or employers partially or fully fund the education or training of workers with the aim of getting a return on this particular investment in form of workers being more competitive, more productive which will translate to increased profitability of the firm in the foreseeable future. It is important to note that returns are always realized even though it may prove to be difficult to measure these returns. Education and training lead workers to earn higher real wages; higher real wages are supposed to be paid from productivity gains (Nicolae et al, 2010, p. 255). Therefore, these real wages should provide a lower bound on the probable productivity increases size. Practically, the productive gains are usually higher; for example, if training offered by a firm has a large firm- specific component and labour mobility is restricted effectively, the productivity gains are not necessarily passed on to the workers in terms of wages but instead reflected in direct profitability, productivity, and competitiveness measures (Blundell, Dearden, Meghir, & Sianesi, 1999, p. 22- 23). It should be noted that measuring returns of education and training for firms is faced by a number of difficulties. This can be attributed to the fact that it is very difficult to obtain firm’s data on profitability, competitiveness, and productivity. Moreover, there may be difficulties in identifying concepts of specific and general training, as well as identifying how much and whether the costs are borne by employers and/ or by workers. Furthermore, Blundell, Dearden, Meghir, & Sianesi (1999, p. 8) identify contribution to the economy as one of the main focus of human capital explanation in regard to contribution of education and training in the economy. They argue that unlike the contributions of education and training to individuals, and the firms, their contributions to the economy are usually at the aggregate level. Even though the presence of high private returns’ rate to education and training provides individual with incentives to invest in human capital, its benefits is not restricted to individuals and firms only because they usually spill over to others resulting to gains to the economy as a whole. Social returns (gains to the economy as a whole) often exceed the private return (gains individual obtain from human capital investment) (Burton- Jones and Spender, 2011, p. 45). At the basic level, education and training benefits the society by ensuring that the population is literate and educated thereby contributing to social cohesion and enhanced participation in democratic institutions and processes. Besides, education and training provide positive production spill over or externality such making individuals not to improve their productivity only but also that of the individuals who are less- educated who they work and interact with (Keeley, B, 2007, p. 53-54). As noted in the contribution of education and training to individuals and firms, computing returns often prove to be difficult; calculation of real social returns is more difficult. Quantification of social returns to education and training sometimes fail to include spill over effects. In the light of the incentive structure to individuals and firms, the government has a very critical role to play in support of post compulsory education and training. The fact that education and training are crucial for the social, economic, and political development of any given country cannot be disputed (Pineda & Rodriguez, 2006, p. 182). Numerous studies have shown that post compulsory education and training tends to boost the progress of a country; if a larger population of a country has a post compulsory education and training, the development prospects of that country is highly enhanced (Haldar & Mallik, 2010, p. 19). As such, it is important that the government should increase its role in supporting post compulsory education and training. The government should provide both social and personal incentives in order to encourage and motivate its citizens to undertake post compulsory education and training. Nicolae et al. (2010, p. 251) explain that the remunerative/ financial incentives is one of the ways in which the government can use; for instance, it should use remunerative incentives so that people would be encouraged to undertake post compulsory education and training so as to earn higher remunerations in the future. In addition, it may use coercive incentives where punitive laws and regulations should be put in place to discourage people from stagnating at compulsory education and training. In conclusion, the above discussion as well as available evidence show that human capital is a critical factor in individuals, firms and national economic growth. Human capital explanation has provided detailed information regarding how education and training contribute to the overall growth of the economy from the individual, firm, to the overall national economy. Even though it is undisputable fact that education and training makes significant contribution in the economy, it is evident that calculation of returns from human capital investments may prove difficult. Lastly, since the impact of education and training in the economy is immense, the government should provide more incentives to ensure that the country reaps full benefit especially from post compulsory education and training. References Becker, G 2004, Human Capital: A theoretical and empirical analysis with special reference to education, The University of Chicago Press Blundell, R., Dearden, L., Meghir, C and Sianesi, B 1999, “Human capital investment: The returns from education and training to the individual, the firm and the economy”, Fiscal Studies, 20(1), 1-23. Burton- Jones, A and Spender, J 2011, The Oxford Handbook of Human Capital, Oxford University Press. Haldar, S and Mallik, G 2010, “Does Human Capital Cause Economic Growth? A Case Study of India”, International Journal of Economic Sciences & Applied Research, 3, 1, pp. 7-25. Keeley, B 2007, OECD Insights: Human Capital, Available: www.oecd.org/insights/humancapital (Accessed: March 3, 2012) Nicolae, T et al. 2010, “Human Capital Accumulation and Long-Run Economic Growth”, Economics, Management & Financial Markets, 5, 4, pp. 250-255. Pineda, J and Rodriguez, F 2006, "The Political Economy of Investment in Human Capital", Economics of Governance, vol. 7, no. 2, pp. 167-193. Read More