Based upon the work of Schultz (1971), human capital theory rests on the assumption that formal education is highly instrumental and even necessary to improve the production capacity of a population. The human capital theorists argued that an educated population is a productive population (Olaniyan & Okemakinde, 2008). Ayeni (2003), on the other hand, agreed that education as an investment on human capital improves the status of beneficiaries, creates job security for trainees and attracts monetary and non-monetary benefits. Therefore, the spending on human capital (workforce) is a worthwhile and productive investment similar to the investment in nation’s physical assets (Olaniyan & Okemakinde, 2008).
The rationality behind the investment in human capital as emphasised by Babalola (2003) is based on the following that:
1. the new generation must be given the appropriate parts of the knowledge which have already been accumulated by previous generations;
2. new generation should be taught how the existing knowledge should be used to develop new products, to introduce new the processes and production methods and social services;
3. people must be encouraged to develop entirely new ideas, products, processes and methods through creative approaches.
Education and training are the most important components of investing in human capital. As part of the benefits of production, Becker (1963) stated that income of a better educated and trained person is usually higher than overage wage rate. There are five types of training or education which are closely related to the return rate and human capital (Dubra, 2010); these are:
a. education at school: to gain knowledge in the institution that concentrates its activity on training process and offers education as a product.
b. training at workplace: to gain new skills and to improve the gained skills at work place:
c. general training: skills that can be used at any enterprise;
d. specific training: it makes no impact on the employee’s productivity if he/she works for another enterprise.
e. other knowledge: any other information obtained by an individual to improve his/her own economic situation.
However, Babalola (2003) further explained that formal education has the potential for stimulating economic growth and development or economic progress because of the inherent potential of the former to increase human capital productivity. The human capital model of Robert (1991) advocated education as a tool for improving human capital, stimulating labour productivity and boosting the levels of technology across the globe. Human capital theory is heavily influenced by the neoclassical economic conception of human behaviour which believes that human behaviour is driven by the compulsion to maximise individual benefits. Actions and decisions are believed to be based on economically rational decision-making that utilises market information to make a balanced and informed assessment of probable outcomes. Applied to education decisions, this view argues that students are like entrepreneurs; they seek to increase the economic value of their skills and work output and maximise the value of their initial investment.
The education factor in increasing productivity has never been disputable, especially in the modern situation of technical and scientific progress (Gods, 2008). Labour productivity is related to specific work skills and attitude of an individual; however, educational level is one of the main productivity indicators. The employers of labour perceive the educational level of employees as a productivity signal – the higher is the education level, the higher is the productivity. Besides educational level, there are other productivity signals, such as educational institution, educational programmes and even the country where the education has been obtained.
