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The Labour Market » Labour Quality and Human Capital

What you'll learn this session

Study time: 30 minutes

Edexcel spec: 1.2.5 (c) and (d)

Why both the quantity and the quality of labour matter to a business
What human capital is
How education and training raise human capital and the quality of labour
The benefits of this for workers, firms and the economy

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Quantity and quality of labour

A business needs workers, but it needs the right workers too. Two things matter: how many workers it can get, and how good they are at the job. This lesson is examined on Paper 1 (Microeconomics and Business Economics).

Key terms:

Quantity of labour: the number of workers, or hours worked, that are available to a business or an economy.
Quality of labour: how skilled, knowledgeable and effective the workers are.
Human capital: the skills, knowledge and experience that workers have, which make them more productive.
Education: learning, usually at school, college or university, that gives workers knowledge and qualifications.
Training: teaching workers the particular skills they need to do a job well.

Why quantity matters to business

A firm cannot make more goods or serve more customers without enough people. If there are too few workers, the firm may turn down orders, keep customers waiting or work its staff too hard. If there are plenty of workers, the firm can grow and meet demand. The quantity of labour depends on things from the lesson on the demand for and supply of labour, such as the size of the population and migration.

Why quality matters to business

Skilled, well-trained staff make fewer mistakes and work faster: quality of labour matters

Ten skilled workers can often do more, and do it better, than ten workers who are not skilled. Higher-quality labour helps a business in several ways.

📈 More output

Skilled workers make more in the same time. This is higher productivity.

✅ Better products

Well-trained workers make fewer mistakes, so there is less waste and fewer faulty goods.

💰 Lower costs

Fewer errors and faster work mean the cost of each item can fall. This can help the firm compete.

💡 Flexibility

Workers with good skills can learn new tasks and use new technology, so the firm can change with the market.

Quantity and quality go together. A firm with many poorly trained workers may still struggle. A firm with a few brilliant workers may not have enough hands to meet demand. Most firms want enough workers, and good ones.

Human capital

You already know that capital is man-made resources such as machines. Human capital is different. It is not a machine. It is the skills and knowledge stored in the people themselves. A nurse who can run a ward, a mechanic who can fix hybrid engines and a programmer who can write safe code all have a lot of human capital.

Human capital builds up in two main ways: through education and through training. The more human capital workers have, the better their quality of labour.

How education and training raise human capital

Courses and college raise human capital, the skills and knowledge workers bring to a job

Education gives people general knowledge and qualifications, such as reading, number skills and subject knowledge. Training gives people the exact skills for a job, such as using a machine, serving customers or following safety rules. Both raise human capital, and so raise the quality of labour and productivity.

Education and training take time and cost money. Someone has to pay: the worker, the firm or the government. Even so, the gains can be large. Let us look at who gains.

Who benefits?

👨‍🏫 Workers

Skilled workers are more likely to find a job and to keep it. They can often earn higher wages. They can move to better jobs and different types of work more easily. This links to occupational mobility.

🏭 Firms

Firms get higher productivity, better quality products and lower costs for each item. Trained workers can use new machines and ideas, so the firm can grow and compete.

🌍 The economy

A better-educated, better-trained workforce produces more output. This can raise economic growth and the standard of living. Fewer people are likely to be out of work, so there is more tax revenue and less need for benefits.

Worked example

Marlow Plumbing has 10 plumbers. Each fits 4 boilers a week. The firm pays for a training course in a new type of heating system. Afterwards each plumber fits 5 boilers a week and has fewer faults to fix later.

Output rises from 10 x 4 = 40 to 10 x 5 = 50 boilers a week. That is a rise of 10, or 25%. The training raised human capital, so the quality of labour and productivity rose. The plumbers can ask for higher pay. The firm can take more orders. The economy produces more.

Costs to remember

Training is not free. A firm pays for the course and loses the worker's time while they are learning. A firm may also worry that a trained worker will leave for a rival. Governments pay for schools and colleges from taxes. Students who stay in education longer give up earning time, which is an opportunity cost. Even so, the gains for workers, firms and the economy are often worth it.

Common mistakes

Writing that quality of labour means the number of workers. Quality is about skills. Number is quantity.
Saying human capital is machines. Machines are physical capital. Human capital is in the workers.
Only giving the benefit to the worker. Always think about workers, firms and the economy.
Forgetting the chain: education and training lead to more human capital, which leads to better quality labour, which leads to higher productivity.

Exam-style question

Dunmore Bakery employs 8 bakers. The owner pays for each baker to take a course in making sourdough bread. After the course, the bakers make 20% more loaves each hour and throw away fewer loaves.

(a) Define 'human capital'. [2 marks]

(b) Explain one way the training could benefit the bakers. [2 marks]

Model answer

(a) Human capital is the skills (1) and knowledge of workers that make them more productive (1).

(b) The bakers now have a new skill (1), so they could earn higher wages or find it easier to get another job (1).

(c) The bakers make 20% more loaves each hour, so output rises (1) and the bakery can sell more (1). Fewer loaves are thrown away, so costs for each loaf fall (1). This can raise the bakery's profit or let it lower prices to compete (1).

Exam tip

In an 'analyse' part, join your points with words like 'so' and 'because'. Here: training, then higher skill, then more output, then lower costs.

Recap

Quantity of labour is how many workers there are. Quality of labour is how skilled they are. Businesses need both.
Human capital is the skills and knowledge of workers.
Education and training raise human capital and the quality of labour.
Workers gain pay and job chances, firms gain productivity and lower costs, and the economy gains output and growth.

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