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Sources of Human Capital

One of the main sources of formation of human capital is the investment in education. The other sources are investing in health, in job training, information and migration. This is the reason why parents spend so much on the education of their children. The money spent on education is akin to the money spent by companies on capital goods in order to increase future profits. Education is given in order to increase the income in some future date.

Similarly, health is also considered as a very essential input for the future development of a nation. Health is also important for the development of individual. Obviously a person with good health can work much better than a not so healthy person. Therefore, the money spent on health services in order to ensure the well being of individuals in a society is very essential in order to attain growth.

Preventive medicine( vaccination), curative medicine( medical help during the course of an illness), social medicine ( spreading knowledge about health and achieving health literacy), provision of clean drinking water and good sanitation are some of the expenses related to health. This expenditure on health is directly responsible for increasing the number of healthy workforce and hence is an important source for the formation of human capital.

On the job training is an expenditure that firms generally incur. It has different forms:
  • The workers may be trained under the supervision of a skilled an experienced worker, within the firm itself.
  •  Off- campus training or sending the workers out to undergo training related to the job.
This is a reason why firms usually insist that the workers work for a specified period of time after undergoing the on the job training. The productivity and efficiency of the worker are the benefits that a firm gets after spending on the training. This expenditure on the on the job training is also a source of the formation of human capital because as a result of this expense the firms end up getting much more skilled and efficient labourers who increase the productivity of the company and hence its profits.


Many people shift from the rural areas to the urban areas in search of work. Migration is a phenomenon which happens when people change jobs in order to increase their income. Hence migration is because of two reasons:
  • Unemployment causing migration from the rural to the urban areas
  •  Increase of income which causes technically qualified people like doctors and engineers to migrate.
When migration happens, there is an expenditure involved like the cost of transport, higher cost of living in the migrated persons and psychic costs of living in a different socio cultural society. Since the income got from migration is much more it outweighs the costs of migration. This makes the expenditure on migration a source of formation of human capital.


In order to acquire information about equity markets, labour markets, education, health and other related markets, people have to spend. For example, in order to know the salaries of various positions in various institutions and if the educational institutions are providing the kind of education to ensure employability etc an expense is incurred. Information is very important while making decisions regarding investments in human capital. Expense is also incurred for the efficient utilization of the acquired stock of human capital. The money spent on obtaining information related to any kind of markets is a source of formation of human capital.

Physical capital and human capital are very similar in many ways and have a few dissimilarities.

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