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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.

The Robert Gordon University, Aberdeen P a g e | 1

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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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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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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



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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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Table 3: Public and Private Benefits from education



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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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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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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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