Investment in human capital is believed to be positively related to economic growth. The contribution of human capital formation to economic growth can be explained as follows:
(i) Increase in Labor Productivity Investment in human capital through expenditure on education, health, etc enhances the productivity of labor as they become physically fit and skilled in their jobs. It leads to efficient utilization of the material inputs and capital. With increase in productivity, output increases at an increasing rate and hence economic growth accelerates.
(ii) Innovations Research and development is necessary for innovations in an economy, which lead to advancement in technology and creation of new products. Human capital formation helps in preparing learned scientists and researchers in various subjects who bring out innovative products, technologies and processes and thus add to the economic growth.
(iii) Absorptive Capacity Advanced technology can be adopted only if the skills and knowledge required for using that technology is present in the country. Investment In education and on the job training helps to create these skills and knowledge base and thus helps in absorption of new technologies which lead to higher production and thus economic growth. Thus, it is evident that human capital contributes to economic growth in various ways