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.