The Role of Human Capital in Economic Growth Explained!

Last Updated On -07 Nov 2025

The quality of labor is evaluated and is identified as a human capital leading to economic growth. If you want to learn about the role of human capital in economic growth, you need to learn about how it integrates sustainable economic development. Read more about its definition, types, and how it impacts economic growth.

What is Human Capital?

The knowledge, creativity, experience, and skills of an individual are measured or valued in economic terms, which is called Human capital. It contributes to overall growth and productivity, thus helping in productive potential. There are various types of human capital which is evaluated based on different factors.

Formula of Human Capital

Below is a simplified formula of human capital, even though there is no universally accepted formula. It helps economists to identify the role of human capital in economic output, both mathematically and conceptually. Here, the formula stands for the following factors:

HC = E*S*H

E = Education level
H = Health and well-being
S = Skills and experience

Economic Growth Model: Mankiw-Romer-Weil Model

A specific model, which is used for economic growth, is the Mankiw-Romer-Weil Model. This model reflects how economic growth is not only dependent on products or services, it is on the labor quality. It also integrates sustainable development, as the human capital management integrates these aspects. Human capital is developed from the way technology and the effort of the workforce are used, leading to effective output (GDP).

Y = A×Kα×Hβ×L1−α−β

What are the types of human capital?

In Economics, there are four major types of capital that help understand their impact on a social and global level. For example, trading capital is significant for financial institutions and brokerage firms. Other capitals are debt, working, and equity capital. You can also learn about the difference between physical capital and human capital.

Furthermore, there are other types of capital based on the workforce, their skills, and abilities. The three types of human capital related to the workforce are as follows:

Social capital
Knowledge capital
Emotional capital

Fact of the Formula

Gender equality encourages human capital.

When women are educated and employed, they multiply the benefits of human capital investment. McKinsey Global Institute predicts that if the gender gap is closed in labor participation, the global GDP will increase $12 trillion by 2030.

Impact of Human Capital on Economic Growth

The knowledge and abilities of an individual working on an individual level, for an organization, or for the country reflect on the overall economic growth. You can also learn about the different types of finance and their meaning. The following are the impacts of human capital on economic growth and development.

Technological Advancement and Innovation

Human capital is an integral part of a country’s growth. Human capital helps in combining technology and digital innovation, where the workforce uses the technology for research and development. It helps in the implementation of the new technology, thus creating effective future scopes.

Increased Productivity

Human capital contributes to higher economic output and growth by enhancing a more skilled workforce. It ensures that the organization's members are healthier, leading to an efficient workforce. Furthermore, it contributes to the overall business finance development.

Economic Competitiveness

Human capital helps countries achieve economic competitiveness. If an organization has higher human capital, it helps in establishing its standing in the global market. Henceforth, companies can effectively adapt to the changing capitalist economy.

Sustainable Development

For a country, it is significant to invest in human capital because it helps in establishing long-term economic development. The investment will lead to further political and social development of the country, integrating longevity.

Increased Earnings

With the higher levels of human capital, a country becomes more financially stable. Individuals gain a higher earning potential in the country, leading to a stronger economy and higher-income job opportunities.

Did you know?

The largest form of wealth in the world is Human Capital. Education and skills will drive prosperity effectively, as the human capital accounts for about 64% of global wealth.

Human capital has a significant impact on individuals, businesses, and countries
Human capital helps in improving productivity measures of the workforce
The skills and abilities that it gives to the laborers lead to future economic growth and stability

Frequently Asked Questions on Human Capital on Economic Growth

What are the 4 types of capital in economics?

There are 4 types of capital in economics are trading, equity, debt, and working capital.

What are the factors affecting economic growth?

The factors that influence economic growth are entrepreneurship, government policies, human capital, trade, and the financial systems of a country.

How does HCD affect economic growth?

Human Capital Development (HCD) affects economic growth by allowing development in the global market, thus creating a more diversified economy. It leads to increased demand for domestic services and products, advanced working conditions, and higher salaries.

Why is human capital considered an economic resource?

The skills and experience of a worker have an economic value that is identified as human capital. Henceforth, it is considered an economic resource because it contributes to skill development, intelligence growth, education, and health.

What is the role of human capital in economic development?

The role of human capital in economic development is quite significant because it helps in increasing innovation and productivity, thus enhancing the economic growth of the country.