Chapter 6 Productivity and Human Capital: Why is Bill Gates so much richer than you are?

What is human capital and how does it influence productivity? How does human capital

relate to poverty? How does human capital relate to the wealth of an economy? Does

this explain automation? Will all jobs be automated?

Human capital is the skills, knowledge, and experience possessed by individuals in terms of their value to an

organization. It recognizes that everyone does not have the same skill sets or knowledge and that quality of

work cannot be improved by investing in people's education. Since more efficient human capital induces more

labor productivity, and as economic growth is directly proportional to labor productivity, we can conclude that

human capital and economic growth are directly related. Human capital is to be happened through education

on the job training and learning by doing the most fundamental source of labor productivity growth. The

growth happens in theories, evidence, and policies. Classical growth theory, is mostly view that the growth of

the GDP per person is temporary and that when it rises above the subsistence level, a population explosion

eventually brings GDP per person back to the subsistence level. Human capital is an assist consisting of the

knowledge and skills held by a person that can be used by an organization to advance its goals. Human capital

is the important because some level of human knowledge and skills are necessary in order for an organization

to accomplish anything.
In the labor market: An increase in labor productivity increases the demand for labor. With no

change in the supply of labor, the real wage rate rises and aggregate hours increase.

The increase in aggregate hours increases potential GDP. Because the diminishing returns, the

increased population increases real GDP but decreases real GDP per hour of labor.

The quantity of real GDP produced when the economy is at full

employment is potential GDP. The economy is at full-employment when 200 billion hours of

labor are employed.

Human capital is related to poverty because employment is the primary way out of poverty for

most adults most of the countries. But financial trend has made it repeated and structural, they

also have reduced employment and wages in low- and middle-wage labor markets, which has in

turn increased the quantity of poor households that are headed by working-age adults. Stagnate

wages and increasing unemployment are also causal to rising income inequality. Cost of capital is

the rate of return that could be earned on an investment with similar risk. It can be defined from two

points of view, that of a company and that of a investor. From an investor point of view, the cost of

capital is the required return an investment must provide in order to be worth undertaking. From a

company point of, the cost of capital refers to the cost of obtaining funds debt or equity to finance an

investment. A company's securities typically includes both debt & equity, therefore one must

calculate both the cost of debt and the cost of equity to determine cost of capital. To maximize firms

ability the company should take proper mix of debt & equity in order to maximize company wealth.

Cost of debt is expressed as a percentage in either of two ways before tax or after tax. In case

where interest expense are tax deductable, the after tax approach is generally considered more

appropriate.