Human Capital

1
Human Capital

• What is human capital?
• What is relationship between human capital and
  development?
• returns to investments in education
• private
• social

2
1. Human capital

• Health and education
• similar to physical capital
• it is productive
• it is produced
• through investment - savings and/or credit
• it earns returns - higher wages and many
  non-economic benefits of education and health
• it depreciates - skills erode or become less
  useful so need to re-training good health needs
  constant maintenance - diet, disease prevention,
  sanitation

3
Measuring human capital

• Indicators
• health life expectancy mortality rates, disease
  burden, stunting, nurses/doctors per 1000 pop
• education literacy, school enrolment rates,
  completion rates, years of education,
  teacher-pupil ratios
• Issues
• measuring quantity vs quality
• inequality gender gaps, differences by income
  level, regional gaps

4
2.The contribution of health and education to
development

• 3 main economic impacts
• Improves the quality of labour
• spill-over effects to offset diminishing returns
  to physical capital
• important input into RD and to attract FDI
• also non-economic impacts
• education civilises, promotes democracy and
  development of society
• health passed down through generations

5
Important linkages between health and education
investments
education
health

• Healthier children attend school more and do
  better at school
• longer life span raises return to investment in
  education
• healthier adults can use productively
  investments in education

education
health

• schools teach basic personal hygiene and health
• health programs rely on basic literacy and
  numeracy
• need to train health workers

6
Will income lead to more investment in health?

• Richer countries have higher levels of human
  capital than poorer countries, but will growth
  lead to better health?
• Proxy for health is calories
• answer depends on the income elasticity of demand
  for calories how strong is the relationship
  between income growth and demand for calories?
• Theory suggests relationship is very strong
• a 1 rise in income of the poor leads to a
  near-1 increase in their demand for calories
• empirical evidence suggests relationship is much
  weaker
• in practice elasticity is between 0 and 0.5

7
Theory and evidence slope of line tells us about
the relationship between income and calorie demand
Theoretical relationship
calories
empirical relationship
income
8
Why?

• Income is spent on other things that may also be
  important (health, housing, education)
• even if increases in income are spent on food
• may be on other nutrients,
• on food variety without increasing calories
• convenience foods, with fewer calories
• policy implications
• income growth alone will not reduce malnutrition
• to improve nutrition, specific health policies
  needed feeding programs, meals at school,
  targeted food subsidies

9
What is return to investment in health/education?

• Individuals with more education typically start
  work on higher wages, and have a steeper earnings
  profile over their life-time
• healthier individuals can be more productive,
  lose fewer days to illness, live longer, and so
  therefor earn more
• but comes at a cost
• direct costs of investment hospital/doctor/school
  fees, medicines/books
• indirect costs opportunity cost - income
  foregone while making investment (working instead
  of studying/attending health checks)
• and expected benefits higher wages in future

10
interest rates and discounting

• if rate of interest is r, then 100 invested now
  will earn
• 100(1r) in 1 years time,
• 100(1r)2 in 2 years time
• So 1000 earned in 3 years time is worth
  1000/(1r)3

11
Investing in education discounting future incomes

• Benefits from education occur in the future
• Future benefits need to be converted into a net
  present value by discounting future incomes and
  costs
• r is the discount rate (0,1), the rate at which
  you discount future incomes or costs, equal to
  opportunity cost of capital how much could be
  earned by an alternative activity?
• if NPVgt0, make the investment
• NPV of benefits are higher, for lower r, lower C
  and higher future W

12
Calculating rates of returnto education

• Private returns compare earnings of individuals
  with and without education, net out private
  direct and indirect costs
• Social returns, as above but net out public costs
  of subsidising education

13
Rates of return to investments in education

• Generally high, and higher than on other forms of
  investment
• highest social rates of return are to primary,
  where primary education is not yet universal
• private higher than social because governments
  often bear most of costs of education
• returns to education decline with development
  higher supply of educated workers lowers price
• social rates of return underestimated because do
  not include wider benefits of education

14
is a biscuit now worth two in the future?
If choose 1 biscuit NOW, NPV1 If choose 2
biscuits LATER, NPV2/(1r) If couldnt decide
12/(1r), so r1, i.e. 100 if chose 1 NOW,
1gt2/(1r), so rgt1 (high) if chose 2 LATER,
1lt2/(1r), so rlt1 (low) didnt include costs
hunger pangs risk theyd all be eaten!