THE IMPACT OF HUMAN CAPITAL ON LABOUR PRODUCTIVITY IN MANUFACTURING INDUSTRIES IN ENUGU AND ANAMBRA STATES, NIGERIA.

ABSTRACT

This  work  discusses  the  effect  of  human  capital  on  labour  productivity  in manufacturing industries in Enugu and Anambra States.   The study applied the ordinary least squares and the principal component Analysis in the estimation.  The evaluation results show that human capital has a positive effect on the sectoral labour productivity level of the industry.  Training, Education, Medicare and Research are strongly correlated with productivity.   By all econometric standards the statistical evidence showed that the linear regression model was adequate and the Jargue Bera Statistic confirmed the fact.   The principal componenant analysis adopted in the research revealed that Onitsha Aluminum manufacturing company has the highest impact of human capital. In the kmo and Bartlett’s Test conducted, all variables except Medicare extraction communalities are greater than 0.5, and component matrix shows that Training of all the components of human capital has the highest impact on labour productivity. Moreover, there are indications of under investment of human capital in some manufacturing industries.  There is need to improve upon the level of investment and productivity of human capital so as to produce positive efficiency effect for productivity growth in the manufacturing industries

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

It is now a generally accepted view that human capital plays a key role in the development of any nation. In fact, the differences in the level of socio – economic development across nations is attributed not so much to natural resource endowment and the stock of physical capital but to the quality and quantity of human capital. Human resource development tends to improve the quality and productivity of labour, which in turn, leads to economic growth. Besides, acting as an important vehicle of achieving equitable income distribution, human capital is also a potent means of addressing  the  problem  of  poverty.  In  the  words  of  Nwaobi,  (1996) “human  resources  constitute  the  ultimate  basis  for  the  wealth  of  the nations. Capital and natural resources are passive factors of production”.

Human beings are the active agents who accumulate capital, exploit natural resources, build social, economic and political organizations and carry forward national development. Clearly, a country, which is unable to develop the skills and knowledge of its people and to utilize them effectively in  the  national  economy,  will  be  unable  to  develop  anything  else. Economists had long realized the importance of human resource development   in   the   development   process.   For   instance,   besides

emphasizing the importance of education at various points in The Wealth of Nations, Adams Smith specifically includes the acquired and useful abilities of all the inhabitants or members of the society in his concept to fixed capital. Alfred Marshal also emphasizes the importance of education as a national investment and, in his view, “the most valuable of all capital is that invested  in  human  beings.  In  spite  of  this  awareness,  most  early economists  still  regard  physical  capital  as  the  main  component  of  a country’s productive wealth; they still relegate natural and human capital to the  background.  It  took  the  effort  of  Schultz  (1961a)  and  others  to rediscover the importance of human capital, which has in a more recent effort to incorporate investment in education into the mainstream of economic analysis.

In its very general form, human capital refers to the aggregate stock of a nation’s population that can be drawn upon for present and future production  and  distribution  of  goods  and  services.  It  comprises  the essential variables (i.e knowledge, skills and attitude) available within each unit of a nation’s human resource stock. The United Nations Economic Commission for Africa (UNECA: 1990) describes human capital as the knowledge, skills, attitudes, physical and managerial effort required to manipulate capital, technology, and land among other things to produce goods and services for human consumption. In other words, human capital is the totality of human potentials (knowledge, skills, attitude, energy and

technology), inherent within a nations human capital stock. This, if properly developed and harnessed, would yield a high level of labour productivity. Human capital can therefore be conceived as a developed skill, knowledge and the capabilities of all the people of the society and which are needed in the labour market for the production of goods and services. In economic terms, it could be described as the accumulation of knowledge and its effective investment in the development of an economy (Harbison and Mayer 1964)

Generally, human capital is developed in several ways. The first is through formal education, involving pre-primary, primary, secondary and higher education. The second is “in–service or on the job” training, which is a systematic or informal training programme in employing institutions in adult education programme and through membership of various political, social, religious and cultural groups. The third way is individual, self- development. This occurs when individuals seek to acquire greater knowledge, skills or capacities through preparation on their own initiatives. Human capital can also be developed through improvement in the health of the working population by means of better medical and public health programmes  and  improvement  in  nutrition,  which  jointly  increase  the working capacity of people on a man-hour basis as well as over a working life. The improvement in formal education, health and nutrition can be both a cause of productivity growth and a result of it. Finally, human capital can

be developed through importation of educated manpower, mostly technical expertise and consultants. Of the various ways of human capital development, formal education seems to be the most veritable.

Corvers (1994) discussed the four effect of human capital on labour productivity: the worker effect, the allocative effect, the diffusion effect, and the research effect. The effects are based on the studies of Nelson and Phelps (1966), Welch (1970), Ram (1980) and Pencavel (1991), inter alia. The work argue that the first and second of these effects underpin the relevance of human capital for the productivity level, whereas the latter two effects underpin the relevance of human capital for productivity growth.

Welch (1970) has explained the first of these, the worker effect (or productivity effect). He assumes that firms produce only one good with the production factor education, and that other resources are given. The worker effect refers to the positive marginal productivity of education with respect to that particular good. Workers with a high level of education are assumed to be more efficient in working with the resources at hand, (i.e. these workers   produce  more  physical  output).  In  other  words,   education increases the effective labour input. Therefore, a better educated labour force shifts the production possibility curves outward. According to Welch (1970; 43) the worker effect is presumably “related to the complexity of the physical production process”. The more complex the production technique is, the more is the ‘room’ left for the worker effect to improve the (technical)

efficiency of production. An increase in the proportion of intermediate or highly skilled workers relative to low skilled workers increases the productivity level of physical units. Productivity shows output per unit of input employed. Increase in productivity comes about from increased efficiency on the part of labour.

The allocative effect points to the greater (allocative) efficiency of better educated workers in allocating all input factors to the production process (including education itself) between the alternative uses. Welch (1970) gives two examples of the allocative effect. If there is one fixed input factor to produce two goods (or varieties), education may improve the total revenues  of  firms  by  means  of  a  better  allocation  of  the  input  factor between the alternative outputs. Although, the production process is technically efficient because the firm produces on the production possibility curve (expressed in physical units), workers have more knowledge of how to maximize the marginal value product (expressed in money units) of the input factor. Total revenues are maximized if the marginal value product of the  input  factor  is  equalized  for  all  goods.  Another  allocative  effect  is present if in addition to education as an input factor two (or more) other inputs are included in the production function. If just one good is produced with two inputs, education may also help to select the efficient quantities of inputs. In equilibrium the marginal value product of the inputs should equal the price of the inputs. In fact, education seems to provide the skills to

make   better   decision   based   upon   the   available   information   (Ram,

1980:366). Education generally has the effect of lowering the marginal cost of acquiring production related information and raising the marginal benefits of such information. As a result of allocative effect, an increase in the relative proportions of intermediate and highly skilled worker is expected to lead to a higher productivity level in money units.

Third, the diffusion effect stresses that better educated workers are more able to adapt to technological change and will introduce new product techniques more quickly. Nelson and Phelps (1966) state that “educated people make good innovators, so that education speeds the process of technological diffusion” (Bartel and Lichtenberg, 1987). Moreover, Nelson and Phelps (1966) stress the role of receiving, decoding and understanding information in performing a job. In fact the diffusion effect can be regarded as  a  special  case  of  the  allocation effect.  A  higher  level  of  education increases the ability to discriminate between more and less profitable innovations and reduces the uncertainty about investment decisions with regard to new processes and products. Therefore, education increases the profitability of successful and early adoption of innovations. Higher proportions of intermediate and highly skilled workers, relative to low skilled workers, would be expected to lead to more rapid and successful adoption of innovations and higher productivity growth.

Fourth, the research effect refers to the role of higher education as an important input factor in research and development (R&D) activities. Research and Development R&D in turn is a key factor for technological progress and productivity growth e.g. the endogenous growth models in Romer (1990) and Grossman and Helpman (1992). Since research and development activities are very complex, a relatively large proportion of intermediate and highly skilled workers is a prerequisite to increase technological knowledge and achieve productivity growth.

This empirical analysis is applied to all the registered manufacturing firms in Enugu and Anambra State.  Since the labour productivity of a firm is a measure of competitiveness, an increase in the employment shares of intermediate  and  highly  skilled  workers  may  improve  the  competitive position of industrial sector. If the employment shares of intermediate and highly skilled labour are either too small or too large relative to the effect on firms’ labour productivity, this may point to under investment or over investment in human capital. The rest of the work is structured as follows: chapter two provides some stylized fact on human capital situation in Nigeria, and further traced the link between education and human capitals. Chapter three reviews theoretical and empirical issues; while chapter four outlines the analytical framework and the model as well as the method of estimation and evaluation, Data sources and measurement. Chapter five shows  the  evaluation  and  interpretation  of  research  findings.    Further

explanations were made with the help of principal component analysis Kmo and Bartlett’s test. Chapter six constitutes in detail the summary, policy implication, and conclusion.

1.2. STATEMENT OF PROBLEM

Although, Human capital theory is not exactly watertight nor is causality easy to establish, yet the impact of human resource development on the industrial productivity is decidedly positive. It is really a matter of regret that after over decades of experimenting in the art of industrialization, most of our  industries  still  remain  lukewarm  to  the  fundamental  concepts  of industrial engineering technology. The level of technology has been very low. It is a common observation that many of the capital equipment and machinery used in the factories are obsolete and are of low yielding and low  efficiency  capacity.  In  case  of  their  breakdown,  repairs  are  more difficult because their models have since been discarded. The result is that production is often disrupted in our factories.   The corpus of empirical research unequivocally leans toward an affirmation of direct causation for which the East Asian countries are recent examples. This consensus was not forged from the beginning; it was inspired partly by disenchantment with absolute growth oriented development strategies pursued in the fifties and sixties which neglected or marginalized the social sector- education, health and others,  yet  failed to deliver robust growth in industries or achieve poverty reduction as well. The argument of those that may be termed the

“growth fundamentalist school” manifestly lost its force and was in urgent need of revision. Thus  attempts to placate growing social and political discontent occasioned by deepening poverty led to the shuffling of relative emphasis on purely growth oriented policies and concerns about social conditions (World Development Report (WDR), 1995:36).

Partly, also, a body of solid empirical evidence confirming that investment in human capital could spur productivity and accelerate development instigated it. This, in effect is a repudiation of the mainstream orthodoxy’s prescription of cutbacks in social programmes on the excuse that they are a burden on the national budget. Needless to say that such spending fosters social peace necessary for the economic apparatus to function effectively. Moreover, it constitutes a direct affront on the economic doctrine that holds income maximization as the supreme objective of national economic policy and a measure of the wealth of nation. The corollary: human resources -not capital, income or material resources are the basis for the wealth of nations. Clearly the era of ignoring human resource development is now passed; skating over the human resource factor may not only imperil the growth process, it may ground it. Undoubtedly, human beings are the active agents who accumulate capital, exploit natural resources, build social, economic and political organizations to   advance   productivity   in   industries   and   national   development.

Significantly though, the progress made has been less rapid to   markedly attenuate Nigeria’s dependence on expatriates for the operation of many vital functions. Particularly worrisome has been the deterioration in the quality of educational service at all levels, especially at higher education levels where persons are trained to take up leadership roles in science, technology, management and business. Moreover, the expansion of human capital stock has not been matched by a commensurate advancement in physical capital. The net consequence has been paltry growth of productivity, income and meager returns to education over the years.

The developments in Nigeria’s education system have attracted considerable empirical scrutiny (Yusufu 2000). The mechanics of how human  capital  influences  productivity  has  however  attracted  modest inquiry. The political rhetoric surrounding this issue is quite long, but argumentation  with  scientific  investigation  especially  for  Enugu  and Anambra states is scarce. This is the motivation behind this research. The research is also important for Nigeria that is faced with astronomical level of unemployment paradoxically among the highly educated. Therefore, it is pertinent to investigate how significant education is to industrial productivity in the context of high unemployment among the well read.  In view of this, the critical research questions are: why has the productivity in industries been fluctuating around very low levels of performance? Is increase in

productivity level  of  individual  firms over  the period attributable to firm learning? What really determines the effectiveness of human capital in labour productivity in industries? These questions constitute the focal problem of this research.

1.3.    AIMS AND OBJECTIVES OF THE STUDY

The general objective of the study is to investigate the impact of human capital on labour productivity in the industrial sector in Enugu and Anambra states. This is in recognition of the key role that human capital plays in the micro economy and the growing world–wide perception. Low human skill especially in developing countries is a major factor in such increasingly global problem of low productivity in industries. The specific objectives of this research are:

1. To provide a quantitative evaluation of the impact of human capital on labour productivity in Enugu and Anambra states. This will be applied to selected industries in the states to help us make sound probability statement on impact of human capital on industries in the two states.

2. To determine the statistical significance of the impact of human capital on labour productivity

3. To determine the difference in the productivity level in the two states

4.  To make recommendations that will enhance the contribution of human capital towards labour productivity at both micro and macro levels of the

economy (ie to suggest ways of improving productivity through human capital).

1.4. STATEMENT OF WORKING HYPOTHESES

The study will be guided by the following hypotheses. The hypotheses will be verified with the use of data collected from the survey and inferences made  from  the  analysis  of  the  data will  form  opinion  or  basis  for  the acceptance or rejection of the hypothesis.

1. Ho:  Human capital does not affect productivity in the manufacturing sector in Enugu and Anambra States.

2. Ho:  The  impact  of  human  capital  on  labour  productivity  is  not statistically  Significant

3. Ho There is no difference in the productivity level in the two states.

1.5     THE RELEVANCE OF THE STUDY

The  relevance  and  usefulness  of  this  study  is  not  in  doubt. Productivity involves embracing not only a necessary change for attaining better   results   but   also   an   ability   to   review   situations   whenever circumstances demand.  It involves the adoption of an analytical approach in determining proper objectives and the best operational options for achieving  optimum  results,  using  the  best  combinations  of  men  and material resources (or what is available of these) for the best possible production of goods and services within a given time or period.

We must accept the general view held all over the would, that a nations  level  of  comfort  and  well  being  of  its  citizenry,  bear  close relationship   with   the   quality  and  quantity  of   what   it   produces   for consumption and for exchange.  In our prevailing circumstances the need for improved productivity in every facet of our industries takes on an urgent significance.  It becomes not just a method of ensuring a better quality of life, but rather a necessity for our national survival.   It is our belief that productivity improvement in Enugu and Anambra State like in the industrialized nations should.

–        pave the way for a reduction in consumption of imported materials

–        enable  us  to  develop  import  substitution  manufactured goods, by putting into optimum use many of our expensive

–        or sophisticated equipment.

–        Dispose us towards better unitization and maintenance of plant and buildings with local development of several other imports needed for running an efficient economy.

Our people are the most precious resource, and the aim of development and productivity, is to improve their quality of life and welfare.

Productivity – growth must of necessity enhance the realization of other important national economic objectives such as attainment of higher average real income or leisure time, even distribution of income and employment opportunities.   It also promotes other important   national   non   –   economic   objectives,   such   as satisfaction,  physical  and  social  environment,  national  defense and  social  justice.     If  we  truly  inculcate  and  practice  the productivity culture, there would be an obvious improvement in our quality of life.   Productivity improvement would not be at the expense of our people; rather it would result in the reduction of waste in its entire ramification.   This includes waste of time, materials, equipment, capital, foreign exchange and above all human efforts.

The   two   state   governments   are   fully   aware   of   its responsibilities  towards  the  citizens  of  the  two  states.    This

awareness underlies the quest for the optimum utilization of all available human and material resources in securing for the people of Enugu and Anambra State a better and higher standard of living.   We are also aware of the fact that the process of rapid industrialization  brings  with  it,  deep  structural  changes  with specific implication of technological development or process, and global interdependence. Our determined effort to expedite development in all spheres of the economy implies giving greater priority to increase in productivity in every sector of our industry.

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