Human Capital Externalities and Productivity in Cities

Abstract

Purpose: Human Capital Theory states that individuals invest in their human capital in order to enhance own productivity which is in turn rewarded by higher wages. The theory asserts that investments in human capital are undertaken by individuals until the point where the marginal productivity gained equals the marginal opportunity cost (from the individual’s viewpoint). Benefits of human capital accumulation by a person need not pertain to that person solely. An individual’s investment in her own human capital may also increase productivity of the other factors of production, i.e. physical capital or human capital of others. Importantly, the channels of such influence – the most prominent of which is sharing of knowledge and skills through formal and informal interaction between people in the same industry, city, region or economy – may not be internalized within firms or families. This gives rise to human capital externalities.

Methodology: The technique used is DEMATEL method. A questionnaire was constructed and answered by eleven experts. Then the DEMATEL method was applied to analyze the importance of criteria and the casual relations among the criteria were constructed. The study period is 2021-2022.

Findings: Factors affecting productivity in cities can be divided into several categories:

Factors related to human resources, Factors related to management, Factors related to the government, Equipment and facilities, Technology, Environmental factors, Materials and energy.                                                                 

Originality/Value: Human capital can be defined as those skills, abilities, and knowledge embodied in an individual which contribute to a productive process by creating value, whether it be economic or social.