HUMAN CAPITAL FORMATION AND FACTORS INFLUENCING IT IN LATVIA
Znotina Daina, Mg.soc.sc., PhD student,
Daugavpils University, lecturer of Rezekne higher Education Institution
The article discusses the theoretical aspects of the concept of human capital formation and practically observes factors influencing human capital in Latvia. The main focus is on the demographic factors, influence of health, education and innovation on the human capital development as the core driving force of any company or region.
Keywords: human capital, factors influencing human capital, demographic situation, education, health, Latvia.
In theory implementation of innovative and efficient technologies should contribute to companies resulting in regional economic growth. However, people are the ones who work with technology and the efficiency of its use is directly dependent on their knowledge, skills, and personal characteristics.
People are the resources no enterprise can exist without. People create the company’s added value. In contemporary terminology instead of the concepts “personnel” or “staff” we use “human resources” and “human capital”. The concept “human resources” emphasizes that people are the company’s major assets, who work together to drive the company towards its objective. However, the concept “human capital” is used in the context of investments; investment in employees’ growth and development and improvement of company’s performance, understanding the investment into company’s fixed capital and assessing the return on investment, which appears as a result of performance [1, pp. 2]. Human capacity development, cumulation and use at work are the issues scientists and economists are interested in for more than two centuries.
Initial thoughts regarding human capital are reflected in the original works of the British economists William Petty, Adam Smith, as well as the American economist Garry Becker [2, pp. 34-45]. In the second half of the 18th century Adam Smith in his book “The Wealth of Nations” began developing the concept of human capital. Later A.Smith’s thoughts were formulated in human capital science [3, pp. 224-228]. In the second half of the 20th century Theodore Schultz attributed the undiscovered difference of income levels to the remaining factor – human capital. The scientists defined the human capital theory as “the knowledge and skills that people obtain as a capital by learning and training professionally. Such capital is a product of well-considered investment which gives revenue” [3, pp. 224-228].
Analysis of training and development as an investment in human capital was offered in the works of leading economists G. Becker, E. Denison, S. Fabricant, J. Mincer, T. Schultz [4, pp. 545-551].
The human capital theory shows that the investment in people gives individuals and the society an economic benefit [5, pp.341-359]. This theory emphasizes that investment in education, in-service training and development, as well as in other knowledge has a positive impact on productivity and salary increase, thus economic benefits are obtained by both the individuals and society as a whole. According to the scientist G. Becker’s concept, human capital analysis starts with the fact that an individual decides to undergo learning, professional training, medical care and other knowledge and health competences, assessing the benefits and costs [6, pp.385-409].
G. Becker points out that the new technological discoveries cannot bring benefits to the countries where there are few skilled workers who know how to use them. Economic growth is highly dependent on synergies between new knowledge and human capital. Therefore, the increase in education and training has accompanied the progress of technological knowledge in all countries that have reached a significant economic growth . Thus, G. Becker acknowledges education and training to be the most important components of investing in human capital, and better-educated and trained human’s income is generally higher than the average salary index [8, pp.101-119].
The value of human capital is largely determined by the ability to use it in the given environment. Under different political, socio-economic conditions the possibilities to use human capital are different. For example, in Latvia in the beginning of the 1990s when the transition from the command to market economy took place, the situation in the labor market changed as well. There was a demand for business, marketing, banking specialists, security guards, public officials, etc., but technicians, engineers, etc. were no longer required . The labor market required completely different skills that differed from those people had mastered. As the result in a short time human capital lost its value generated in decades because there was no use for it under new circumstances. A large part of the economically active inhabitants faced the need to adapt to the new circumstances, to retrain and acquire new knowledge, which required adaptation of the education system for training new specialists demanded in the labor market.
Latvia National Development Plan 2007-2013 determined an individual-centered state development approach, choosing the growth model “People at the first place” , where increase of the life quality of individuals is the objective of the development of the country.
The key elements of human capital formation and implementation most directly affecting the labour productivity are motivation, working environment and relationships, employers’ strategies of labor exploitation. Society’s human capital development is significantly influenced by its human resources. Decrease in the proportion of people of giving age in the community significantly worsens the living conditions of other groups – children, youth, and retired people; there is financial resources decline for development of human capital within the community. According to the data of the Central Statistical Bureau there were 2.23 million people in Latvia in the beginning of 2011, or 18.7 thousand less than the previous year. Sustainable Development Strategy of Latvia till 2030  estimates that in 2030 the society in Latvia will be materially different from that living in the country today. It is expected that by 2030 the population will not exceed 2 million people. Most of them will be older than 45, but already by 2020 the number of the retirement age people will be higher than that of children and youth under the age of 18. When making long-term forecasts regarding the population, currently there is no reason to think that the situation will change after 2030, on the contrary – Latvia’s society will continue aging.
National human capital development is also greatly influenced by such demographic factors as lifespan and migration processes. According to the information of the Central Statistical Bureau, in 2010 in Latvia men’s life expectancy was 68.3 years, women’s – 78.1 years. According to the provisional calculations, the average life expectancy of people born in 2010 is 73.8 years, including men – 68.8 years, women – 78.4 years. The population decline rate in 2010 was 0.83% compared with 0.57% in 2009. Because of the natural movement of population the number has decreased by 10.8 thousand, but due to the long-term migration – by 7.9 thousand. In 2010, 2.8 thousand people from other countries came to live in Latvia, but 10.7 thousand people moved for permanent residence in other countries.
Latvia’s National Development Plan 2007-2013 emphasizes that “health is a human basis of of life quality, personal and family well-being” . Life expectancy changes in Latvia are increasingly affecting the working age population health and vitality, especially that of men. The circulatory system diseases being the main cause of death in Latvia have the greatest impact on life expectancy changes. The data of the Central Statistical Bureau show that circulatory diseases in 2010 resulted in 54% of all deaths, the second most common cause of death was tumor, 7% of all deaths, were caused by external causes – road accidents, drowning, violence, or intentional self-harm. The Ministry of Health has developed the public health guidelines for the period 2011-2017, where the main objective is to increase the life expectancy of Latvia’s population to 71.1 years for men and 79.6 years for women. Similarly, the guidelines determine the courses of state action as a policy-maker to ensure the residents’ quality of life by taking all possible measures to prevent external and human lifestyle-related causes of diseases. By 2017 it is planned to extend the newborn average anticipated life expectancy by two years, to extend the healthy years of life by two years and to reduce potential lost years of life by 20%, which are the years that a person would have lived to 65 years, if s/he did not die in an accident or because of other causes .
In the Human Development Report 2006/2007 there were noted the following major health problems in Latvia:
Four years have passed since the publication of this report, but all of these problems are still topical, we can say that they have become even more topical because of the economic crisis. Currently, both state and people in Latvia in general care for health insufficiently. It is possible to achieve higher and better rounded life expectancy figures by improving public awareness of a healthy lifestyle, making the health care system accessible and of high quality, limiting the health spread of addictions (alcohol, tobacco, etc.), and achieving greater control of stress factors.
The education policy is an important tool for effective mobilization of human capital. Education and science funding and education quality largely determine human capital competitiveness. In the informative report “On Required Structural Reforms in Higher Education and Science for Increasing International Competitiveness of Latvia” (approved by the Cabinet of Ministers on January 12, 2010) it is indicated that annual total costs per one student in Latvia are considerably lower than in other EU countries. The work group has established that Latvia has a very low ration of state funding for higher education in GDP. In Latvia higher education gets 1.5% from GDP (0.74% public and 0.76% private contributions, in the EU on average 1.13% public and 0.23% private contributions). Recently the proportion of private contributions in total funding of higher education has reduced. Meanwhile developed countries have an opposite tendency – private contributions into higher education increase every year .
When the economic crisis started, many countries did not reduce funding for higher education or reviewed prior accepted funding increase plans, but some European countries even increased funding for higher education and science being aware of the role of knowledge in the economic growth of the country and managing crisis. The European Universities Association in its overview of May, 2010 about the impact of the economic crisis on the European universities indicated that some countries reduced funding to higher education institutions by less than 5% (Czech Republic, Poland, Serbia, Macedonia). Decisions on significant reduction were made by Italy (10% within 3 years), Estonia (7% in 2009 and 10% in 2010), Ireland (5.4% in 2009 and 9.4% in 2010), Great Britain (6.6% in the period of time from 2010 to 2013), Lithuania (8%) and Romania (10%) .
Country’s human capital either globally or regionally has to become competitive in order a country become competitive. Basing economy on knowledge and innovation in its development of human capital is the key factor. National Development Plan of Latvia emphasizes that ‘in order to ensure economic competitiveness in the global market, it should be based on superior technology for large, medium-sized and small companies which are able to respond flexibly to global or local changes in the economy. Therefore, formation of more and more new high value-added creative companies has to be facilitated, as well as transition to production of high value added products has to be ensured for existing companies” .
Thoughtfully implemented educational policy can be a tool for effective mobilization of human resources. Nowadays education is expensive; it requires significant financial investment and time consumption for individuals, employers, and the state. Considering the limit of resources and lack of labor tendencies, Latvia cannot afford to train specialists who will not be able to use their acquired knowledge by working in the chosen profession anymore. Such circumstances lead people into the ranks of the unemployed or they are forced to seek employment in other countries. If the acquired skills are not used, they lose value. One of the most common problems in Latvia is a job not complying with the acquired education. As already mentioned by the author, formerly this non-compliance was caused by structural changes in the transition to a market economy, but currently it is caused by overproduction of social science professionals and shortage of specialists in technical spheres. The fact that there is a lack of qualified workers with scientific knowledge can significantly slow the development of production of innovative technology in the future.
Innovation activities in Latvia so far were mainly promoted at the national level, but in recent years the regional dimension of innovation is gradually developing. The regional innovation system is based on the concentration of a region-specific business, investment, human resources, as well as science and technologies. The regional innovation system is a network interconnecting private, municipal, regional, academic and other organizations that interact with each other and complement each other. An important role in these regional innovation networks is devoted to innovation supporting infrastructure, which generally is provided by regional universities, scientific institutions and such still relatively new organizations in Latvia as:
Human capital is the most difficult to control resource. Its effective use is the key provider and promoter of any company’s or region’s competitiveness. In order to use the society human capital effectively, a coherent education, labor market and social protection system must be created.
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