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Role of Human capital theory on UK universities 2011
1.0. Introduction
Education is important for any individual to improve their knowledge and skills to
participate fully and efficiently in economic and social developments of a society.
Education is directly related to one’s country over all development in ages of Adam
Smith. “Education and training [should] enable people in an advanced society to
compete with the best in the world”. (NCIHE, 1997) Universities play a significant
role in providing high quality of education to society. Universities in United Kingdom
had a successful journey throughout the history of Morden education. And in recent
years there has been an unpredicted rise in the number of students enrolling for
higher/tertiary education compared to past. According to BBC News 2010, there
was about 481,854 accepted applicants in 2009, 25,227 more than 2008 - an
increase of 5.5% overall. While there was 8.7% rise in number of applicants than
the previous year. The admissions service, UCAS, noted a particularly large rise
(15.3%) in applicants aged 25 and over. It also said the number of accepted
applicants had gone up by 44% since 1999. It’s always an individual’s choice when
it comes for choice of higher education (HE). The importance of investment in HE is
explained Human capital theory, emphasising on Labour market, Rate of returns,
and other factors influencing HE.
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Role of Human capital theory on UK universities 2011
2.0. Human Capital Theory
Human capital is in general represents the investment people make on themselves
that enhance their economic productivity. Adam Smith, 1776 defined human capital
as “Fourthly, of the acquired and useful abilities of all the inhabitants or members
of the society. The acquisition of such talents, by the maintenance of the acquirer
during his education, study, or apprenticeship, always costs a real expense, which
is a capital fixed and realized, as it were, in his person. Those talents, as they make
a part of his fortune, so do they likewise that of the society to which he belongs.
The improved dexterity of a workman may be considered in the same light as a
machine or instrument of trade which facilitates and abridges labour, and which,
though it costs a certain expense, repays that expense with a profit.”
The theoretical framework most responsible for the wholesome adoption of
education and development policies has come to be known as human capital
theory. According to Fagerlind and Saha, (1997) human capital theory (HCT)
provides a basic justification for large public expenditure on education both in
developing and developed nations.
Raise in number of students enrolling in universities of UK can be explained with
help of human capital theory (HCT). However economic evaluation of educational
investment projects should take into account certain criteria according to
Psacharopoulos and Woodhall (1997) which are:
• Direct economic returns to investment, in terms of the balance between the
opportunity costs of resources and the expected future benefits;
• Indirect economic returns, in terms of external benefits affecting other members
of society;
• The private demand for education and other factors determining individual
demand for education;
• The geographical and social distribution of educational opportunities; and,
• The distribution of financial benefits and burdens of education.
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Role of Human capital theory on UK universities 2011
3.0. Economic returns
3.1. Direct Economic returns
Direct economic returns are mostly concerned with individuals who opt for higherstudies. They can be valued through earnings premium and rate of returns.
Studies show that countries with higher levels of education and skills have on
average higher levels of productivity and economic growth (Machin and Vignoles
2005). Individual tries to read the current labour market situation since entering
into higher studies is sacrificing present earning against the investment in learning.
Educational attainment is strongly linked to average earnings. According to OECD
2010, in UK, graduates of tertiary education earn more overall than upper
secondary and post-secondary non-tertiary graduates – their earnings are 153% of
the earnings of people at the lower level of education. At the other end of the
education scale, people who have not completed upper secondary education earn
only 78% of what those with upper secondary or post-secondary non tertiary
education earn as shown in Table 1.
Table 1: Earning figures for various education levels of individuals
(OECD Countries, 2011)
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Role of Human capital theory on UK universities 2011
According to OECD 2010 Annual tuition fees for HE for a student in UK costs about
$5000 USD with about 50 to 55% of financial aids available in various forms of
loans, transfers and scholarships it is easy for a student to make an investment
based on willingness and ability of studying. Rewards are typically higher for
individuals attaining HE than upper secondary education or postsecondary non-
tertiary education– HE brings substantial rewards in most countries, generating a
net financial return over a man’s working life of more than USD 350 000 and USD
152 858 for a woman, as on Table 2.
Table 2: Financial returns over man’s life time
(OECD Countries, 2011)
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3.2. Indirect Economic returns
For the public sector, the costs of education include direct expenditures on
education (such as paying teachers’ salaries), public-private transfers, and lost tax
revenues on students’ foregone earnings. Economic benefits of educational flow are
not only for individuals but also for government when these individuals enter into
labour market in form benefits like increased revenue from income taxes and social
insurance payments on higher wages as well as a lower need for social transfers.
These public returns, which take into account the fact that providing education is
also a cost to governments, offer an additional perspective on the overall returns to
education (Walter W. McMahon, 2009). The net public return from an investment in
HE exceeds USD 95,318, accounting for the main cost and benefits at this level of
education. This is almost triple the amount of public investments made in tertiary
education and as such, provides a strong incentive for governments to expand HE.
Higher level of education in a wider concept helps the society indirect ways E.g.;
better educated individuals generally have better health, which lowers public
expenditure on National Health Service. Also, their earnings premium means they
spend more on goods and services, which have wider economic benefits.
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Role of Human capital theory on UK universities 2011
Table 3: Public and Private Benefits from education
(OECD Countries, 2011)
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1.0. Demand for Education (Labour Market)
As the World is getting more competitive every employer looks out more
productivity with quality and efficiency which can be an outcome of investment on
education/ educated graduates. Demand for education always exists in the labour
market, although employability in the labour market is mostly where the supply of
educated individuals meets the demands where they must meet various educational
attainments. According to the labour force survey of UK 2010, after the onset of
most recent recession, the un-employment rate for new graduates was 20% in the
third quarter of 2010. This was the highest unemployment rate for new graduates
in over a decade with almost 1 in 5 recent graduates. This was almost double the
rate before the start of the recession, which stood at 10.6% and unemployment for
around 1 in 10 recent graduates. By the end of the recession the rate for new
graduates was 2.3 times higher (18.5% compared to 7.9%), as on Table 3.
Table 4: Graduate unemployment rates
(Labour Market, ONS,2011)
The rate of unemployment rate is lowest for graduates who complete HE when itscompared to that of persons who have a primary or secondary education which is
about 40-45% and 25-30% respectively when compared with to that of graduates
with HE which is about 20% as on Table 4.
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Role of Human capital theory on UK universities 2011
Table 5: Unemployment rates by age and qualifaction
(Labour Market, ONS,2011)
Although hiring of tertiary graduates is high with the levels of education and
relevant experience. It’s convincible that the rate of employment is high for
graduates with HE which has figures about 75 to 80%.
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Role of Human capital theory on UK universities 2011
4.0. Individual demand for education
Individuals tend to take up HE not just for financial earnings but also for betterment
of their life style. A study by the HE Funding Council for England (HEFCE) shows
that Graduates are less depressed, healthier, more likely to vote in elections and
help with their children's education, The also shows advantages that graduates
derive from HE cover not only better jobs and higher pay, but also a wide range of
other social and personal benefits.
On average, graduates are less likely to smoke, are less obese, have a higher sense
of well-being, and read more to their children. They are also more likely to hold
more tolerant attitudes towards other races, and are more likely to be involved in
their communities through voluntary activities.
They also cost society less. They are less likely to require social security benefits,
and their healthier lifestyle places less burden on the National Health Service.
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5.0. Financial distributions
As there was financial reforms announced in England for HE on 2004 which was
further reformed in 2007 helped out more students to take up HE. From these
reforms poorest students gain the most, due to generous increases in maintenance
grants and subsidies outweighing the total increase in the costs of entering
university relative to the system that was replaced. HE reforms do in fact include a
substantial insurance component. There are no longer any exemptions for fees
based on parental income. Instead of being payable upfront, all fees are now
deferrable until after graduation, with loans available at a zero real interest rate,
repayable according to income (at 9% above a threshold of £15,000) (Dearden et
al, 2005) and (Dearden et al, 2007).
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6.0. Conclusion
Education is one of the biggest assets of any country which aims for development of
society. This has been borne in mind of most government and also individuals who
share in that society.
Form convincing evidence provided that individual with higher education have a
higher earning premium and higher rate of returns attracts more students to take
up higher education while the labour market in UK also supports this statement by
providing more employment opportunities to educated individuals is another
positive aspect to gain a higher education. And it’s always common that individuals
with better education gain more social benefits and enjoy better healthy lifestyle
with more leisure time and incomes to spend.
While Government supporting more cause of studies in financial forms and the
reforms in higher education in 2007 have significantly helped students at lower end
enrol in further education whilst there was a prediction in raise in tuition fees by the
year 2012 triggered more number of students to enrol into higher education.
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