What Is Human Capital?

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Human capital may comprise a firm or a nation’s current stock of talent, aptitude, education, abilities, and knowledge. It is the intangible collective resources that people and groups within a population possess. In economics, human capital is a term that describes traits judged valuable to a company.

Key Takeaways

  • Human capital refers to the pool of knowledge, skills, and other human qualities possessed by individuals that contribute to their productivity; it implies the fundamental productive capacities of human beings.Social scientists use this term while refer to the monetary worth of a worker’s knowledge and abilities.In contemporary literature, costs, income, education, and health are evaluated as a basis for measuring human capital.According to the human capital hypothesis, sufficient investment in people will lead to economic growth; however, it is criticized for having simple assumptions and nonrobust measurement of skills.

Human Capital Explained

Human capital refers to the fundamental productive capacities of human beings. It includes the pool of knowledge, skills, and other qualities possessed by individuals. It contributes to human productivity.

Investing in education, on-the-job training, and health can enhance these capacities. Evaluation of this concept is often in terms of profit as it is an asset providing a flow of services. However, broader measurements of production are also employed.

The history of Human Capital etches back to 1776 when Adam Smith referred to a similar concept in his work ‘The Wealth of Nations. Although Adam Smith did not use the term, he paved the way for studying it. He emphasized that individuals’ learned and utilized skills are the primary source of a nation’s wealth and economic development. Later in 1920, Alfred Marshall described the long-term nature of investments in human capital and the family’s role in making them in his work Principles of Economics. In addition, Marshall expands the concept of returns on human capital to incorporate nonmonetary factors. However, criticism of Marshall is seen for delaying the study of this concept as he did not place it on par with physical capital.

Human Capital And Education

Human capital research has shown to be a particularly successful field of study with ramifications for people, businesses, and governments. The general topic has generated a vast amount of study, with education as an investment in this capital as the main focus.

Human capital is a crucial element of the productive foundation; education is responsible for developing human capital resources for the economy and society. Education raises a society’s quality of life through enhancing human competencies, social norms, habits, and production. It is a nation’s education investment to promote economic prosperity. Investing in it for sustainable development cannot be overstated.

Globally, the years spent in education are a significant factor in calculating human capital. A substantial rise in the average years spent in formal education enhances a nation’s people capital. However, the investment in education will be advantageous since it will increase employment opportunities, economic activity, and growth. In addition, education may increase both economic and noneconomic rewards through improving health and nutrition.

It contributes significantly to economic expansion and sustainable development. There are several methodological advancements for measuring human capital stock. To measure it, contemporary literature evaluates costs, income, education, and health. In addition, in terms of education and language ability, it is a primary factor of variations in company ownership between groups.

Human Capital Theory

Human capital theory refers to enhancing human productivity and efficiency with a greater emphasis on education and training. The study of human resources constitutes the study of human capital. It discusses the formation of economic value based on how our society functions.

It was first developed by Becker (1962) and Rosen (1976), implies that each worker possesses skills or talents. To enhance or accumulate such traits, training or education is essential. Hence, every day, managers must be able to teach, train, and lead their employees. They should serve as a focal point for workplace guidance. And strive to retain excellent organizational, social, and operational skills. Managers should seek to comprehend how their team members operate and develop their abilities.

According to this theory, sufficient investment in people will lead to economic growth. For instance, several nations provide their citizens with a free college education because they recognize that a better-educated population tends to earn and spend more, encouraging the economy.

This theory may appear appealing, although the core idea is not without its flaws. The notion underlying the human capital theory is that individuals should invest in themselves. However, many may argue that workers are first and foremost assets, whereas some individuals find it depressing to be referred to as “business equipment” or corporate property.

Others contend that this capital development approach does not permit precise measurements of abilities and skills. To evaluate or reward employees based on these is intangible. It can also result in charges of favoritism and bias in the job. While improving employee skillsets and competencies is essential, it is not sufficient to sustain a whole enterprise. Modern sociologists and anthropologists disagree with the theory, arguing that it is based on fairly simplistic assumptions.

Examples

Let us look at the following examples of human capital to understand the concept better:

Example #1

You are the Human Resource (HR) Manager at ABC Ltd. You decided to enhance your human capital by investing in their education following the human capital theory. So you ask your staff development and training officer to suggest ways. After considering several options, you choose to create a fund dedicated to employee learning. 

You suggest the company invest in its human resources through the Learning Fund. Once top management approves, you initiate offering employees up to $5000 annually for educational programs and degrees. Additionally, you pay up to $1000 annually for learning and development activities, which include conferences, publications, online courses, and webinars. This makes your company ABC a most sought-after organization to work for due to its learning and development possibilities.

Example #2

A recent research report by McKinsey focuses on how an organization can reap its human capital by providing adequate and suitable job transfers. The report highlights that the concept goes beyond macroeconomics as each person has specific skills and selects how to use their strengths.

The report underlines the possibility of how geography, family, and education might have shaped people’s beginnings in a limited manner. Also, career alternatives rely on an individual’s strengths and traits, networks, family commitments, labor market health, and societal variables. Hence, managers deal with such limitations by offering appropriate job transfers for growing skills and incomes. Their findings demonstrate that stepping into a new career pays well, especially if it pushes someone’s capabilities or utilizes their expertise.

Importance Of Human Capital

  • It is essential because it increases productivity in several ways. First, according to the its hypothesis, education is an investment in skills that contributes to increasing production.Education raises an individual’s human capital stock, enhancing productivity and contributing to economic growth.Human capital, indicated by the accumulation of scientific knowledge, is directly responsible for generating new designs/ideas. Moreover, by enhancing research and development, investment in such capital promotes an increase in physical capital, which results in economic expansion.Individuals’ continuous acquisition of knowledge, whether via deliberate efforts or learning by doing, increases labor and capital productivity, contributing to economic growth.

This has been a guide to Human Capital and its definition. Here, we explain human capital and education, its importance, theory, and examples. You may learn more from the following articles –

Its formation refers to accumulating such capital over time. It is the process of obtaining and growing the quantity of qualified and knowledgeable individuals. It is crucial for the growth of an economy. Such formation may be done by creating a competent, trained, and productive workforce through improved education, health care, etc.

It may degrade if talents are underused. The highest rates of related depreciation are found in professional and management positions. This is frequently determined by earnings or the capacity to remain in the workforce. Human capital depreciates most frequently due to unemployment, injury, mental deterioration, or failure to keep up with innovation.

Human capital measurements, commonly known as HR metrics, enable organizations to evaluate the value and efficacy of human resources efforts to prepare for the future. Such data includes turnover, cost-per-hire, and benefits participation rate. In addition, metrics are employed to describe the workforce and worker characteristics to measure the efficacy of HR procedures.

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