INVESTMENT IN HUMAN CAPITAL – AN INVESTMENT IN FUTURE

Jula Octavian
Universitatea Babe-Bolyai
Facultatea de tiine Economice i Gestiunea Afacerii
Dumitrean Crinuta Nicoleta
Economist Dr.

Abstract: The paper aims to study, reveal and understand one of the most important production
factor, considered by some as being labor, understood nowadays as human capital. It is
important to reveal and to demonstrate that the investment into human capital will have results
with a very high return on investment, maybe not so seen in the first years to come just after the
investment, but for sure as a big result and a cause for economic development. The investment
into human capital can be determined by public or private investment. Either the case the result
will be in favor of the national economy.

Keywords: investment, human capital, economic development, labor flows.

JEL codes: A10, A14, D24, I28.

1. Introduction
In economic perspectives, capital is generally thought to be assets that serve as resources for a
company. The term human capital is a component of capital and has many definitions, with most
relating to the knowledge, skills and abilities that people bring to a specific job within an
organization (Young, McManus, & Canale, 2005). Some describe human capital as a
“commercially valuable skill” (Marcus, Ippolito, & Zhang, 1998, p. 490), while others describe
human capital as “the attributes of a person or people that are productive in some economic
context” in an organization (Econterms, 2004) According to Nobel laureate Gary Becker,
education is investment to us, which raises one’s productivity and thus the remuneration. Better
known as Human Capital Theory, this concept describes its mechanism within the framework of
economic analysis. (See Becker (1974)). What maybe Becker did not take into account is not
only the benefit for the individuals, but also the benefit for the society and for the national
economy as a whole. Those benefits can be expressed in value as remittances for those that are
working abroad and sending money into the country and also at the level of knowledge, know-
how, possible to be brought in the home country. We must say that is for sure those individuals,
in which states are investing and in the end they are working elsewhere, the investment is not
totally lost, or we must say that the investment is not lost at all and this because of at least two
reasons. One, in the case that they are working abroad usually they are in the case of having
remittances, which can be a very powerful and quite cheap way to invest in future generations.
On the other hand if they are working abroad and let’s assume that they are not sending nothing
back, at least they are producing more goods and services, so that the possibility of imports of
cheap and very good, products from which is benefiting the entire society and not only the
producer’s country.
We can, and for sure must see the education as an investment, an investment into the future, and
also we must see the education as maybe the most important public spending policy, because, it
has the most certain way to have the highest return on investment.
On the other way we must see the investment into education from the point of view of the
training on the job. Maybe we should see this problem as a continuation of the education started
in the early stages. More and more we are speaking about long life learning program as a follow
up of the high school program and bachelor in the universities.
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The other important way to analyze and to develop the investment into human capital is the
return on investment. If in the first two cases it is quite easy to debate, because we think that it is
quite impossible to measure the positive or negative effects, in the case of remittances for
example those can be measured quite accurately together with the percentage from GDP to be
invested into education. Maybe it is a link, maybe not, but for sure those two elements can led to
enough elements in order to link the degree of education, level of the education and the income
for the national economy seen as remittances. For the countries on the way to development it is
one important way to have cheap money.

2. Human capital theory

2.1. Education as an investment
According to the theory, one would pay for the education up to the point where the present value
of the costs equate to the present value of the stream of income generated by the educational
achievement. In the case of the university the total costs are composed of the costs with the
tuition fess and the opportunity costs (for example the income at which the individual has to
renounce at in order to be able to take course). Of course this opportunity costs can be as to say
recovered from the difference in payment that can result from a higher wage due to a higher
qualification. Unfortunately this possible increase in wage is not certain, but, the loss of the wage
in the university years it is. So the individual has to decide between a possibility and a sure thing.
As other investment taking risks can lead to increasing revenues or higher losses. For instance the
cost of a bachelor program in USA can go till the level of 30.000 – 50.000 US dollars in
comparison to the cost of approximately 2500-5000 euro in a country on the way to development.
Of course a degree obtained into a university considered to bring more knowledge can be the
“cause” of a very well paid job. So maybe the effort is worth taking. Once again it is not sure.
There are a few functions that can be used in order to determine the annual rate of return to
education by using the years of education in roder to obtain annual earnings. Those functions are
called Mincerian wage function (Mincer (1974)).
Or an internal rate of return, a familiar concept in investment literature, may be derived for the
case of education by equating present values of costs and benefits of education. The internal rate
of return to education usually falls between 5 to 10 %, being greater than that of typical financial
investment. (See, for example, Sveinbjorn et.al (2002)) However, many question the meaning of
such economic returns to education. The educational credential is also known to act as a signaling
device, since the future employee’s productivity is not revealed before the employment takes
place. It is a proof of his/her ability at workplace. The empirical difficulty, however, is to verify
whether education raises productivity as in the human capital theory or reveals it as in the
signaling theory, since in either case education is likely to raise earnings. Still, it is probably safe
to say that it has the both elements.

2.2. On-the-job Training

By and large everyone faces an initial period of difficulty when he/she starts working, which will
gradually sooth away, and then the wage will eventually start rising. This suggests “there are
certain skills you can only learn at workplace so that the longer you work the more productive
you become,” and this is the idea of “On-the-job Training” or “Learning-by-doing.” Becker
(1964) divided OJT into two types: general training and firm-specific training. General training is
a training of skills which can be used in any firm and therefore the trained worker can raise
his/her productivity in any firm, while firm-specific training cannot raise the worker’s
productivity other than in the training firm.
This argument raises an issue about the incidence of OJT costs. The basic idea is as follows. If
OJT is general then the worker can use the skill wherever he/she goes and thus it is worthwhile
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for the worker to pay for it --- on the contrary, the training firm will not be able to recover the
investment if the worker decides to leave and so there is no merit in paying for it. If, on the other
hand, OJT is specific then it will not be in the interest of the worker to pay for it as this OJT does
not affect his/her productivity anywhere else and thus it would be the firm to pay for the training.
This distinction, however, is a highly theoretical one and in reality any OJT is likely to be a
combination of both elements

3. Remittances
If we want to see the importance of the education we must present a few data’s concerning the
size and the importance for the remittances in the economies no matter those economies are weak
or strong.
In each case we are speaking about huge sums of money, sums that sometimes are the same or
even higher in comparison with the level of the budget for the educational field either the public
or the private one. The migrant workers are accumulating knowledge in the countries in which
they are going, they have access to technologies, sometimes transferring back home, sometimes
not. Even in those cases some researchers are having doubts into linking the development with
migration. In their perspective this link is much more complex and if it is not well achieved it can
produce much more negative than positive effects. For some authors the gainers are the
destination countries and not the origin ones. In our view all the time from the international trade
benefits the most the country which is poorer and not the wealthy one, this being also a reason for
the migration.
Remitances and their weight into the international trade for some countries
Country Remitances % in % from
(billion of US dollar) EXPORT IMPORT
Romania 750 9,0 6,3
Poland 2897 6,6 5,5
Hungary 1018 3,9 3,7
Cech Republic 408 1,2 1,1
Slovakia 366 2,8 2,3
Bulgaria 230 3,8 3,8
Slovenia 112 1,0 0,9
India 10280 21,6 17,3
Greece 7510 50,5 29,3
Mexico 6014 4,6 4,3
Turkey 5727 10,5 10,3
Egipt 4403 32,6 20,1
Portugalia 4031 11,6 8,8
Spain 3249 2,0 2,0

The level of the remitances in the first 7 countries of the world (2009)
(billions of US dollars)

Country India Mexico China France Philippines Pakistan Bangladesh

Remitances 26,90 23,97 22,52 12,00 12,00 6,50 3,4

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 Remitances

30 26.9
23.97
25 22.52

20

15 12 12

10 6.5
5 3.4

0
India Mexico China France Philippines Pakistan Bangladesh
Country

ROMANIANS REMITANCES FOR 2000-2008 (BILLION OF USD)148

2000 2001 2002 2003 2004 2005 2006 2007 2008

Total inflow, out of which: 96 116 143 124 132 4,733 6,707 6,800 7,000
Remitances of workers 2 4 7 14 18 3,754 5,506 -
Employes compensation 94 112 136 110 113 954 1,157 -
Transfers for migration - - - - 1 25 44 -
Total outflow, out of 6 5 7 8 8 34 56 -
which
Remitances of workers 1 1 - 1 1 4 6 -
Employes compensation 5 4 6 7 5 24 42 -
Transfers for migration - - 1 - 2 6 8 -

World Bank is considering that the level of the remitances for our on the way to develop
country is to represent aproximately 5,5% from the GDP.

ROMANIANS REMITANCES FOR 2000-2008 (BILLION OF USD)

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008
Sum in billion US dollars 96 116 143 124 132 4733 6707 6800 7000

148 Source: data’s from the World Bank Report.

http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21352016~pageP
K:64165401~piPK:64165026~theSitePK:476883,00.html
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 Remitances of romanians between 2000-2008

2008 8000
2006 7000
6000
2004 5000
2002 4000
2000 3000
2000
1998 1000
1996 0

4. Difficulties regarding the investment into human capital

There are a few problems to be discussed when a government is having investment into
something. The investment into human capital is bringing together with common problems of the
investments in general some other specific problems.
- Existing tax laws discriminate against the investment in human capital, sometimes they do not
have a fiscal deductibility.
- Unemployment (i.e., sitting idly) causes human capital to deteriorate so the investment
sometimes is not for life.
- There are hindrances to free choices of professions. In this situation it is possible that one
investment to be fully lost if the individual is changing field.
- There is a need to provide funds for investment in human capital, and thus, long-term public
and private loans should be made available to students. This can be a problem in the situation of
low financement of the educational system or in the cases of financial crises when investing can
represent a problem.
- There should be investments made in migration (i.e., in helping people settle and find
education). This can be seen as a problem to be considered also when we speak about
remittances.
- There has been a failure to adequately invest in those who sit on the periphery of society. This
can be a problem when we are speaking about education as a cause and a necessity for the free
market system.
- The return on public investment in human capital should not be returned directly to each
individual. The individual will see a return in the form of wages, and will benefit from a strong
economy.
- As a society, underdeveloped countries should be assisted to achieve economic growth, and to
begin investing in human capital. This is a very important measure in order to be taken by those
countries that are considered as being emergent countries and this can be a quite sure investment
in order to diminish the gap to developed countries.

5. Ideas for future considerations

There is no double that the demand for higher education continues to grow globally. This comes
together with the decrease in the population number and still the number of students is increasing
a lot into these times.
Maybe the experience of those countries that have invested into education was an example, a
good example for the emergent economies. Yes it is necessary to have funds in order to invest.
And for sure when we are speaking about funds we need to take into account also the choice, to
invest in education or in something else.

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Maybe the investment in education will not show directly and obvious the benefits of the
investment, in comparison with some other investments, for example in communication services.
Yes we must say that the investment into education should represent a basic investment, a start
for the other investments
The realization of return to educational investment is a long term process and it is not simple to
quantify the outcome, which often results in underinvestment --- this is one of the reasons why
free education exists particularly at primary and secondary education with governmental
supports.
It is important that the companies should receive fiscal and financial support in order to invest in
education. So a help provided by the governments, by the law regulators it is not only obvious
but also necessary.
Paul Bouchard, in his article entitled "Training and Work; Myths about Human Capital"
challenges seven basic assumptions used in the theory of human capital. Briefly, they are as
follows:
Problem 1: Human Capital is in investment in the future.
-It is impossible to accurately predict future labor market needs. All the forecasting tools we have
are problematic. Not only for the developed countries but also for the emergent ones and also at
the regional level.
Problem 2: More training leads to better work skills.
-Organizations value particular skills and what these are often change over time. There are not
necessarily 'better' skills, just ones that fit what serve the needs of the organization at the time.
This is also a solution when we are speaking about structural unemployment. It can become a
solution of requalification of the labor force.
Problem 3: Employees need to improve their skills.
-Work has not become more complex, in fact, with technology things have become 'easier'. The
need to improve one's skills comes from having to compete in a job market with people who are
in many cases over-qualified. So sometimes the need for qualification is not for increasing
productivity but to become more competitive between workers.
Problem 4: Training enhances employability.
-Many individuals do not have access to training and thus access to jobs, while others may have
access to training, but not to mobility within the organization.
Problem 5: Training can compensate for skill shortages.
-Bouchard argues there are not skill shortages, rather there is a skill-mismatch. In other words,
for various reasons, individuals with appropriate skills do not find work. Three potential reasons
for this are: labor market dynamics, structural discrimination, and employee self-selection.
Problem 6: Employment and unemployment are economic concepts.
-The labor market is NOT a market like any other. In all situations, but with very few exceptions,
the supply of labor force will exceed the demand for labor force. So that the problem of
qualification for workers it is a problem of becoming more competitive on this specific market.
There are social forces present that keep people from having equal access to employment
regardless of their skill and experience.

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3. Becker, G. (1964). Human Capital (8th ed.). The University of Chicago Press.

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