Human Capital Development and Productivity Relationship

ABSTRACT

This study examines the relationship between human capital development and productivity. Productivity is the dependent variable while human capital development indicators and gross capital formation are the explanatory variables. Recurrent and capital expenditures on health and education are used as human development indicators. The scope of the study is from1977 to 2003.

The Ordinary Least Square method was used to determine this relationship. It has revealed a negative relationship between gross capital formation and productivity.

However, human capital development was found to affect productivity significantly. It is therefore advocated to adopt policies that will improve the expenditure on health and education.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The issue of human capital development is of great importance in any economy particularly developing economy such as Nigeria. The twentieth century has become the human capital century. People and skills matter, the wealth of a nation is embodied in its people, that is, the working class. Although advanced countries but the poor countries are becoming more aware of the importance of people the advantage countries but the poor countries are becoming more aware of the importance of people the advancement of the economy. This study is therefore of great significance to the world at large.

Labor is one of the four factors of production. The others are capital, land and entrepreneur. In the nineteenth century, people were of little importance to industrial giants such as Britain, Germany, France and the United States. However, in the early 1900 attention began to shift to education of people at secondary and higher levels and provision of welfare services such as health services.

The Nigerian economy has however failed to move at the pace of other countries in the world. Although effort have been made in the area of human development in the part, there has not been a substantial improvement in the human capital development in the past, there has not been a substantial improvement in the human capital indicators such as education and health.

Productivity can be perceived as the output per unit or the efficiency with which resources are utilized. Therefore productivity with respect to human capital development refers to the development of human capital which will lead to efficiency with which resources are utilized and this will increase output. The trend of productivity in Nigeria is one that fluctuates. Productivity in Nigeria compared to that of other countries is very low.

Sustained productivity depends on the economy’s human capital. Human capital can be defined as the skills, knowledge, competencies, and attributes that reside in a worker. Human capital development involves the improvement of a nation’s human capital through better healthcare, nutrition, accommodation, working environment, education and training. The economies of nations and the world at large is dynamic in nature, it follows that the human resources of these nations should be constantly improved on. That is, training of manpower should be a continuous process in order to meet up with the demands of the world market.

Here, the emphasis is placed on education and health. These can also be referred to as indicators of human capital development on productivity.

ducation in Nigeria has improved over the years with increased interest in the tertiary institution. However, a closer attention has to be paid to the needs of the educational sector because the quality and level of educational attainment on the productivity of a country. Certain measures have been put in place to improve the quality of education in Nigeria by the Federal government and other agencies. However, these efforts have not brought about the much desired change in the standard of the education in Nigeria. Failure in the educational sector has been accounted for due to some problems. They include; inadequate allocation by the government to education, lack of dedicated teachers, poor political environment, poor implementation of policies and several others. Private organizations have sprung up to resuscitate the educational sector. This is evident through the increase in private schools in the primary, secondary and even the tertiary level. Nigerians have lost confidence in the ability of the government to provide good education and this has resulted in high patronage of these private institutions by Nigerians who can afford it. This leaves the bulk of Nigerians that cannot afford private education at the mercy of the government funded schools. The government has failed to realize the gravity of what an underdeveloped human capital can do to an economy. The need for more attention to be centered on this aspect is very necessary.

The health sector is also faced with similar problems as that of education. Health is a very important factor in human capital development. The state of health of labor affects the level of performance thereby affecting the level of productivity. Government has tried in improving health services by reducing the number of population per doctor, providing more health facilities, hospitals and other required health personnel. However, there is still room for improvement in this aspect. The rural areas of the country have been neglected while the urban areas have been focused on, there is still need to reduce the population per doctor, provide preventive healthcare and take drastic measures to reduce the infant maternal mortality.

These discrepancies in education and health of the country have a very significant effect on productivity and hence economic growth.

1.2 STATEMENT OF THE PROBLEM

The Nigerian economy has solved several problems facing it. There has been prolonged economic recession followed by the collapse of the world oil market from the early 1980 and fall in the foreign exchange earnings of the country. Other problems include overdependence on imports for consumption and capital goods, lack of adequate social and economic infrastructure and neglect of the agricultural sector.

Nigeria is rated to be one of the poorest countries in the world. Putting the country’s economy back on track requires a lot of activities that will advance the economy such as rebuilding the economy and making goods and services available and affordable for every one. This is where the issue of productivity comes in since productivity refers to the level of output of a country.

The problem therefore deals with increase in productivity through human capital development so as to increase growth. This study raises questions on how the indicators of human capital development affect productivity.

1.3 SCOPE OF THE STUDY

This study covers all sectors of the economy and all countries in the world as the issue of human capital and productivity affects everyone. However, the study is based on the Nigerian economy and all considerations and analysis refers to the Nigerian economy.

This study covers the period from 1977 to 2004.

1.4 OBJECTIVES OF THE STUDY

The major objective of the study is to determine the relationship between human capital development and productivity in the Nigerian economy through the use of two human capital development indicators; education and health.

The specific objectives include:

• To ascertain the relationship between human capital development and productivity
• To examine the impact of health on the productivity in the Nigerian economy.
• To examine the impact of education on productivity in the Nigerian economy.
• To determine the indicators of human capital development.

1.5 JUSTIFICATION OF THE STUDY

This study is relevant to every sector of the economy. This is because every sector of the economy has labor as its most important factor of production. It is therefore of great importance to the industrial, agricultural, mining sector and so on. It gives them more incentive to invest more in their human resources.

It is also of great importance to the government who have in their hands the authority and responsibility over important indicators of human capital development. This study will encourage government to increase expenditure on education, health and other areas of the economy that affect productivity.

It provides a basis for which investment in health and education will be measured against productivity.

This study is therefore of great importance to all sectors of the economy, the government and other stakeholders such as consumers, shareholders and so on.

1.6 RESEARCH QUESTIONS

The following questions arise in the course of this study and will subsequently be answered. They include the following;

• What is the relationship between human capital development and productivity?
• What is the effect of health on productivity?
• What is the impact of education on productivity?
• What are the other factors that lead to the development of human capital?

1.7 HYPOTHESIS OF THE STUDY

The following hypotheses hold for this study;

• H0 : Education has the lowest impact on productivity

H1: Education has the greatest impact on productivity.

• H0: Health has no significant impact on productivity.

H1: Health has a significant impact on productivity.

• H0: There is no significant relationship between human capital development and productivity.

H1: There is a significant relationship between human capital development and productivity.

1.8 RESEARCH METHODOLOGY

The issues to be raised in this research work are both empirical and theoretical.

The Ordinary least square method of analyzing data will be used and the results will be interpreted.

1.9 DATA SOURCES

Data was obtained from the Central Bank Statistical Bulletin, 2004.

1.1.0 OUTLINE OF CHAPTERS

In order to achieve the stated objectives, the project work has been subdivided into five chapters.

• Chapter one is the introduction which consists of the background, statement of the problem, objectives, justification, hypotheses, scope, research methodology, organization and limitation of the study.
• Chapter two is devoted to past literature written on the subject matter.
• Chapter three is the methodological framework and the model specification.
• Chapter four is presentation, interpretation and empirical analysis of regression results.
• Chapter five boarders on the summary, recommendation and conclusion of the study.

CHAPTER TWO

LITERATURE REVIEW

2.1 CONCEPT OF HUMAN CAPITAL DEVELOPMENT

Human resources make up the standard or the basis for the wealth of a country. Human resources are the summation of efforts, skills, knowledge and experience available in a country. It is the managerial, scientific, engineering, technical, craftsmen and other skills which are employed in creating, designing, developing organizations, managing and operating productive and service enterprises and economic institutions (Yesufu, 1962).

They are a nation’s most valuable resources. They constitute a nation’s human capital.

Human capital refers to the skills, education, health, and training of individuals. It is capital because these skills or education are an integral part of us that is long-lasting, in the way a machine, plant, or factory lasts ( Gary Becker, 1992).

Before the nineteenth century, investment in human capital was not important in any country. Expenditures on schooling, health and other forms of investment were quite small. This began to change during that century with the application of science to the development of new goods and more efficient methods of production, first in Britain, and then gradually spreading to other countries.

During this century, education, skills, and other knowledge have become crucial determinants of a person’s and a nation’s productivity. One can even call the twentieth century the Age of Human Capital in the sense that the primary determinant of a country’s standard of living is how well it succeeds in developing and utilizing the skills, knowledge, health, and habits of its population.

It has been estimated that human capital-education, on-the-job and other training, and health-comprises about 80 percent of the capital or wealth in the United States and other advanced countries. (Gary Becker 1992). Therefore a country without effective human capital development skills will be lagging behind in the issue of development.

The concept of human capital refers to the abilities and skills of human resources of a country, while human capital formation refers to the process of acquiring and increasing the number of persons who have the skills, education and experience that are critical for economic growth and development of a country (Okojie 1995:44). Human capital is so important that in the Khartoum Declaration of 1988, it was asserted that:

…….”the human dimension is the sine qua non of economic recovery ….no SAP or economic recovery programme should be formulated or can be implemented without having at its heart detailed social and human priorities. There can be no real structural adjustment or economic recovery in the absence of the human imperative” (Adedeji 1990:390). In other words, there cannot be meaningful economic growth without adequate human resources.

Human resources development involves the improvement and the transformation of a nation’s human resources by better medicare, nutrition, accommodation, environment, education and training (Yesufu, 1962)

Human capital development can be described as a deliberate effort by Government and people to provide the right number of workers, at the right areas of need and at the right time in an economy that is incentives that will increase the morale of the workers. For example, in Japan, training of human resources is seen as very important in development of the economy. They also provide incentives that boost the morale of the workers. The government is expected to provide policies or programmes that provide the labour needs and a requirement in all sectors of the economy. The existence of a large population does not translate to a productive resource. Human resources can only be productive due to effort made by the government and the private organisations in developing human resources. Human beings become productive resource or human capital only when they are able and in a position to contribute meaningfully to productive economic activities. They have to be trained to become agents of production and economic activities.

Without training they remain passive, potential and inactive as other factors of production. Human beings can be fashioned to lead useful and happy lives and contribute to societal development by the development of their characters and potential abilities through education, training, health services and so on conducted over a long period of years.

The enterprise of human capital development therefore is the impartibility of knowledge and skills to human beings through education and training for productive as well as consumptive ends (U.O Anyanwu). Education is only one form of investment in human beings. Others include expenditure on medical care, migration to more prosperous regions, information about job opportunities and career prospects and choice of jobs with higher training contents. Human capital development is a form of investment with expected economic as well as social returns not only to the individual investor and his family but also the society at large.

The economy, with time, begins to experience growth, while the beneficiary acquires the opportunity to contribute to and secure qualitative live by being able to make the right choices and command higher earnings profile.

Consequently human capital development has been seen as the ultimate concern of all types of development-economic, social, cultural, political, etc. Capacity building or human capital development responds to a wide-range of questions such as what people are able to be or do, the issues longevity, health and mind development, their inalienable fundamental human rights to freedom of choice, speech, association, political, economic, social and other needs and ability to escape from avoidable diseases, malnourishment and illiteracy (HDR Nigeria 1996).

Human Development Report (1996) maintains that sustainability of human capacity building is the essential component of the ethics of universalism of life, stressing that it is a matter of sharing development opportunities between all classes and groups of people between the rich and the poor, between the present and future generations. It is of the view that sustainability demands what it calls intra-generational and inter-generational equity (HRD Nigeria 1996).

Capacity building or HRD has other associated benefits and returns. (Umo 1995) has itemized other crucial contributions of human capital to development in general to include;

• the generalized capacity to absorb economic shocks as well as cope with the complexities of modern development;
• creating a corps of well informed citizenry with positive attitude to national development,
• providing persons for technology base needed for industrialization;

2.2 CONCEPT OF PRODUCTIVITY

The most widely accepted definition of productivity is that it is the ratio of inputs to output. This definition enjoys general acceptability because of two related considerations. One, the definition what productivity is thought of to be in the context of an enterprise, an industry or an economy as a whole. Two, regardless of the type of production, economic or political system, this definition of productivity remains the same as long as the basic concept is the relationship between the quantity and quality of goods and services produced and the quality of resources used to produce them.

Eatwell and Newman (1991) defined productivity as a ratio of some measure of output to some index of input use. Put differently, productivity is nothing more than the arithmetic ratio between the amount produced and the amount of any resources used to produce them. This conception of productivity goes to imply that it can indeed be perceived as the output per unit input or the efficiency with which resources are used.

Olaoye (1985) observed that productivity as a concept can assume two dimensions: namely total factor productivity (TFP) and partial productivity. The former relates to productivity that is defined as the relationship between outputs

Growth in productivity provides a significant basis for adequate supply of goods and services thereby improving the welfare of the people and enhancing social progress (Mike Obadan).

Demburg (1985) said “without productivity there would be no growth in per capita income and inflation control would be more difficult”. A country with high productivity is often known for high capacity utilization (optimal use of resources), high standard of living, low rate of unemployment and social progress.

Productivity measures the relationship between quantitative and qualitative value of goods and services produced and the quantity of resources needed to produce them (that is, factor inputs such as labour, capital, technology) (Sumbeye, 1992; Okojie 1995; Roberts and Tybout 1997).

Mali (1978) defines it as the “measure of how resources are brought together in organisations and utilized for accomplishing a set of results. It is reaching the highest level of performance with the least use of resources”. In this definition, the issue of efficiency is being referred to. Increased productivity will involve the use of less resources and an outcome of more output.

Roberts and Tybout (1997) and Tybout (1992), assuming a neoclassical production function at the sectoral or industry , define total factor output to be a concave of inputs and time (a proxy for technological innovation). To them, the elasticity of output with respect to time is the total factor productivity.

TFP = Total output / Weighted average of all inputs……………..1

The factor inputs include labour, capital, raw material and purchase of spare parts and so on. In a particular sense, these factors are reduced to the weighted average of labour and capital (Okojie, 1995; Roberts and Tybout, 1997).

Partial productivity (PP) is defined as:

PP = Total output / partial input………………………………….2

According to T. M.Yesufu, labour productivity refers to the output result of workers organised within a given economic unit or enterprise. Yesufu outlined the three basic deficiencies associated with the use of labour productivity. They include the following;

1. the term “labour” as generally conceived , is ambiguous and far from inclusive. It excludes some very important categories of human inputs, especially management, marketing, accounting and the white collar workers generally, who are not directly on the production line.
2. even the acknowledged workforce generally used for labour productivity measurement(the blue coated production line- skilled and unskilled labour) as far from homogenous, which complicates the allocation of output between the constituent classes; for example , adult and child labour; male-female, artisan, technician, etc.
3. the output of an enterprise itself usually varies in terms of type , material inputs, labour mixes, sizes of unit products, etc., that are not easily dis-aggregated.

Due to these shortcomings of the use of labour productivity some economists prefer to use total factor productivity as it is said to be superior and more acceptable for purposes of determining enterprise or macroeconomic performance. Partial productivity is particularly used for analytical purposes, to test the relative efficiency of, or returns to, various forms of inputs, and to check, for example, the effect on marginal productivity an increase or reduction of a particular type of input.

2.2.1 The Traditional Concept of Productivity

The traditional concept of productivity focuses on the efficiency in the production or delivery process. In this wise, the focus is merely on the ratio of output to inputs.

Thus, productivity is measured as the amount of output per unit of inputs. Since the emphasis was more generally on labour productivity, the measure was often the amount of output per worker working for one hour.

This traditional approach implies a simple Mathematical relationship so that productivity improvement means producing more with less or the same amount of inputs; or sustaining the same level of output with less input. This traditional view derives from the economic logic of cost minimisation.

One implication of this approach is that traditional productivity improvement schemes tend to focus on how to reduce inputs employed and improve the skills of the workers they retain. Workers lay-offs, while seeking to maintain the same levels of output with the reduced work force became popular at enterprise levels.

The present policy of the Federal Government to reduce the work force in the public service is as a result of this traditional logic.

2.2.2 New Emerging Concept of Productivity

Globalisation and the new forms of competition which it has brought about, however, today require us to focus on a much broader concept of productivity. Likewise, we need to appreciate more fully the changing dynamics of the factors involved in the process of productivity improvement.

As a recent analysis points out, increased competitiveness, the increased complexity of markets, the globalisation of manufacturing and the increased concern about social and ecological issues make productivity improvement more important at the same time that the need for a broader meaning of productivity is required.

Thus, the focus today is increasingly on total factor productivity and the process of its improvement involves improving the overall business environment. This involves the promotion of better labour-management relations, continuous improvement in products and processes, enhancement of the quality of work life and continuous development of the human resource.

In this new conception, the emphasis of the direction to productivity improvement is on increased added value creation, rather than the minimisation of labour inputs.

Emphasis has also been brought to bear on the distribution of the benefits of productivity improvement among all stakeholders (workers, employers, consumers).

Productivity is not seen any more just as the physical increase in output, but also as the improvement in the quality and value or acceptability of the product or service.

Thus, productivity is not just an efficiency concept any more, but equally an effectiveness concept. In an increasingly globalized world, productivity improvement does not just involve the efficient production of products or services, but of “products and services that are needed and demanded and bought by very discerning customers”. Customer orientation is increasingly in the fore and quality is now an important index of performance. Productivity is becoming identical with quality.

2.3 DETERMINANTS OF PRODUCTIVITY

A number of factors affect productivity. Major among these are the complementing factors of production as well as technology/innovation, institutional backup, worker motivation, the quality of labour, environment, etc( U.O. Anyanwu).

To discover the effect of each of the cooperating factors on productivity, we have to go into a theoretical world where we can hold other things constant while varying each of these factors one after the other. Here, we are still relying on the theory of diminishing marginal productivity which states that if increasing amounts of a variable factor, say labour, is applied to a fixed amount of other factors (e.g. land, capital, materials etc.), given the level of technology then beyond a certain number the extra or marginal product of the variable factor begins to fall down or diminish (Todaro 1985)

However, in a real world all the factors impact productivity simultaneously.

(a) Land, A Factor of Labour Productivity Growth

Land can affect productivity both quantitatively and qualitatively. If land is identified as the limiting factor of labour productivity more arable land can be brought under cultivation to relax the land constraint. In this regard a number of forest reserves have, for this purpose, to be deforested. The quality of land can be improved through the application of manure and fertilizer, which also increases the yield per hectare. Other methods of farming that make for more yields per hectare of land such as improved seed and grain varieties have been adopted by modern farmers. New land policies that alter tenure ship and ownership are devices for relaxing land constraints and improving productivity.

(b) Capital Accumulation and Labour Productivity.

If identified low labour productivity is attributable to lack of capital, capital can be raised through the mobilization of domestic and foreign investment. Acquisition of new factories, equipment, and machinery will lead to increases in productivity and output per capita of the nation. The Nigerian Governments are committed to the attraction of foreign investments to, among others; improve the capital base of the country. However, while the efforts are being made to cover the need for further capital, installed capital such as the Liquefied Natural Gas Project, Petrochemical plants, Refineries and Iron and Steel factories, among others need revitalization if our productivity is to increase.

Investment in social and economic infrastructure gives a significant effect to productivity such as roads, electricity, water, sanitation, communication for the facilitation of economic activities.

Road networks are needed to bring the additional product to areas of need, while electricity, water, communication, all play very dominant roles in bringing about the additional product and service arising from the new investment. Dams, irrigation facilities, bridges and road extensions to interior areas all raise product per hectares of cultivated land. Use of chemicals, fertilizers, pesticides, etc. is part of the capital needed enhanced productivity because by raising value of the farm land, productivity is also being improved.

(c)Technology/Innovation and Productivity

Most economists regard technology/innovation as the most important source of growth. Technology is being seen as a new and improved ways of achieving or performing traditional tasks.

Technology can be neutral, labour or capital intensive. Technology is said to be labour and capital neutral when higher output levels are achievable using the same quantity and combinations of factor inputs in a production process. Simple innovations such as re-distribution of labour can result in higher output levels, too. On the other hand, technology may be capital intensive or labour intensive if higher levels of output are possible, with more capital or more labour. Use of simple implements such as those of cottage and small scale industries are said to be labour intensive while those such as electronic computers, automated textile looms, mechanical ploughs, tractors display capital intensity (Todaro 1985).

In industrialized countries where unit cost of labour is very high and expensive technology choice favors one that is capital intensive or labour saving, while in developing countries such as Nigeria where there is abundance of labour and scarcity of capital, choice of technology gravitates towards those that are labour intensive, and capital saving.

There is the fourth aspect of technology called labour or capital augmentation technology. The quality or skill of labour can be augmented by the use of, for example, videotapes, televisions and other electronic communication devices while capital augmentation is said to occur when productivity can be enhanced by the use of existing capital goods for instance iron types etc can replace wooden hoes. Today hybrid products such as cassava, rice, etc that give higher yield per hectare are being developed through technological augmentation.

(d) Labour Force Growth and Labour Productivity.

Labour Force growth an important part of the population growth stimulates economic growth and productivity growth particularly when growth has not attained its optimum level. A large labour force, all things being equal, means a large population and the latter is potentially a large domestic market, and if well endowed, empowered and developed, a great international market, too. However, much depends obviously on the capacity of the economic system to productively employ the additional workers arising from the population/labour force growth. Again this will equally depend on the rate and kinds of capital accumulation and the availability of related factors such as managerial and administrative skills and competence the level of commitment of the political administration.

2.4 IMPACT OF HUMAN CAPITAL DEVELOPMENT ON LABOUR PRODUCTIVTY

Human Capital Development enhances labour productivity and the productive capacity of the economy. Employers regard the qualification arising from capacity building, as a reliable indication of personal ability, achievement drive reasoning for instance that, a graduate must make a better salesman than a man who had never met the