Human capital refers to the economic value of a worker’s experience and skills. It includes assets like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality.

Sources of Human Capital:

• Investment in education: Just as companies invest in capital goods with the objective of increasing future profits over a period of time, individuals invest in education with the objective of increasing their future income.
• Health: A sick labourer without access to medical facilities is compelled to abstain from work and there is loss of productivity. Health expenditure directly increases the supply of a healthy labour force and is, thus, a source of human capital formation.
• On the job training: Firms incur some expenses on the training of their employees. After that they insist that the workers should work for a specific period of time during which they can recover the benefits of the enhanced productivity owing to the training.
• Expenditure on migration: Migration involves cost of transport, higher cost of living in the migrated places and psychic costs of living in a strange socio-cultural setup. However, the enhanced earnings in the new place outweigh the costs of migration.
• Information: Information is necessary to make decisions regarding investments in human capital as well as for efficient utilization of the acquired human capital stock. Expenditure incurred for acquiring information relating to the labour market and other markets is also a source of human capital formation.

Human capital and economic growth:

• Economic growth means the increase in real national income of a country. The contribution of an educated person to economic growth is more than that of an illiterate person. Similarly, because a healthy person can provide uninterrupted labour supply for a longer period of time, health is also an important factor for economic growth. Thus, both education and health, along with many other factors like on-the-job training, job market information and migration, increase an individual’s income generating capacity, which contributes to economic growth.
• Human capital contributes substantially not only towards increasing labour productivity but also stimulates innovations and creates the ability to absorb new technologies. Education provides knowledge to understand changes in society and scientific advancements, thus, facilitate inventions and innovations. Similarly, the availability of an educated labour force facilitates adaptation to new technologies.
• Human capital formation will lead to a high rate of participation of people in economic activities and thus will reduce the gap between the poor and the rich, thus reducing inequality. It further helps in improving the quality of life.

However, while the human capital growth in developing countries has been faster but the growth of per capita real income has not been that fast. There are reasons to believe that the causality between human capital and economic growth flows in either direction, i.e., higher income causes the building of a high level of human capital and high level of human capital causes growth of income.