The correct option is The return in the form of enhanced labour productivity is more than the cost of training..
Explanation
Human capital formation refers to the process of adding to the stock of skilled, educated, and capable people in a country. It transforms physical labor into a productive asset. The primary sources of human capital formation include expenditure on education, health, on-the-job training, migration, and information.Analysis of On-the-Job Training
Firms invest in on-the-job training to enhance the skills and efficiency of their workforce. This expenditure is economically justified based on a cost-benefit analysis:
- Investment Logic: Like any capital investment, expenditure on training is undertaken with the expectation of future returns.
- Productivity vs. Cost: The training is considered a source of human capital formation because the return-measured by the enhanced productivity of the worker-is greater than the cost incurred to provide the training.
- Comparison with other options:
- It increases the social status of the worker. While training may improve social status, this is a sociological consequence, not the primary economic rationale for capital formation.
- It allows the government to collect more taxes from the firm. Increased tax collection is a fiscal outcome for the government, not the definition of human capital formation.
- It reduces the migration of workers to other countries. Training does not necessarily reduce migration; in some cases, skilled workers may migrate more easily (brain drain). Expenditure on migration itself is a separate source of human capital formation.
Key Takeaway:
Expenditure on on-the-job training qualifies as human capital formation because the economic value generated through increased labor productivity exceeds the cost of the training.