Investment in Human Capital and Productivity

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  • 0:05 Investing in Education…
  • 2:58 Investing in Human Capital
  • 4:37 Lesson Summary
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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

This lesson explores the education, knowledge and skills of the labor force - what economists call human capital - including how it affects productivity and economic output.

Investing in Education and Training

Margie's Cake Walk bakes and decorates cakes that get distributed in the grocery stores and in her own bakery within the town of Ceelo. Over the long run, the total supply of cakes that Margie is capable of producing during any given week is 400. To produce these 400 cakes during the week, suppose she has two workers, Layla and Lilah, each working eight hours in a day, five days a week, and each worker is capable of producing five cakes per hour. While it is possible that Margie and her business could produce more than 400 cakes in the short run, 400 represents a pretty accurate boundary that's difficult to exceed for more than a little while. Margie's entire business depends on these workers, and the majority of her expenses are for labor.

Now suppose that Margie calls Layla and Lilah into her office (it's a small office, mind you, because she's hardly ever in there, preferring to stay close to the cakes). Margie tells each of them that she's sending them, one at a time, to a week-long cake baking institute hosted by an organization that I know is very near and dear to your heart, the International Institute of Higher Advancement of the Culinary Dessert Specialists of the Cake Bakers Society of Greater Ceelo, Inc. When the workers return from this extravaganza of cake baking, their knowledge of cake baking has increased substantially and their skills have been developed further. In fact, they now have the ability to produce seven cakes per hour instead of the mere five cakes they could produce prior to attending the International Institute of Higher Advancement of the Culinary Dessert Specialists of the Cake Bakers Society of Greater Ceelo, Inc.

So what does this do for Margie's Cake Walk? Let's do the math again and see what the effect turns out to be. That's two workers, each working eight hours in a day, five days a week, each producing seven cakes, which is 2 * 8 * 5 * 7 = 560 cakes instead of 400. This represents a (160/400) 40% increase in output for Margie's cake business. Assuming she can sell that many cakes, she'll make a lot more money. So what happened in this scenario? Margie invested into the education and training of her employees - what economists call human capital. This increased their productivity and led to higher output.

Investing in Human Capital

Human capital is the amount of knowledge and skills that each worker can apply to their labor. When Margie's employees' knowledge and skills improved, they were capable of baking seven cakes per hour instead of five, which enabled them to produce 40% more cakes in a week, and the output of Margie's business increased.

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