Human Capital
En Español

Human capital investment is an important factor in the development context and affects labor standards directly and indirectly through at least five channels:

1. At a macro level, education is a critical source of economic growth and development. The level of economic development, in turn, is closely correlated with compliance with labor standards. It is widely observed that, on average, the higher the level of economic development, the better is the level of compliance.
2. At a micro level, investment in education and training increases productivity and personal earnings over a lifetime. Differences in wage earnings are explained largely by differences in the level of education and skills. In addition, working conditions improve substantially as production moves from lower skilled processes to higher skilled ones. In their own self-interest, companies improve working conditions to attract and retain better workers, so as to ensure quality control and productivity.
3. Schooling and other forms of education can help to lower the incidence of child labor. In a number of developing countries, targeted enrollment subsidies have been used as an effective way to break the cycle of poverty and illiteracy by addressing both the income loss to parents and education for children.
4. By strengthening the civic institutions and democratization, higher educational attainment in a country raises the level of awareness of human and workers' rights and helps workers form effective coalitions with other segments of society to ensure enforcement of labor standards. With freedom of association, worker organizations can develop in which individuals develop leadership and entrepreneurial skills and learn the value of cooperation and trust through democratic processes.
5. The education and training of all stakeholders in the system improves enforcement mechanisms through enhanced capacity and understanding. In addition to workers, stakeholders include employers, managers, and government officials (i.e., labor inspectors).

The effects of human capital through channels (2), (3), and (5) are direct on wages, working conditions at the plant level, child labor, and plant and organizational efficiency. The effects through channels (1) and (4) are indirect. Higher educational attainment creates an environment that is conducive to growth, broader economic development, and democratization. These, in turn, are closely associated with better observance of labor standards. The indirect effects operate with longer time lags.