Jump to section What is human capital? What is human capital in economics? A modern approach to the theory of human capital Types of human capital How to invest in human capital Who is responsible for human capital within a business? 4 human capital examples done right What human capital examples set you apart? A company is only as good as its people. Their skills, education, and knowledge are examples of how human capital contributes to an organization’s success. Investment in human capital heavily influenced the growth of leading companies like Google, Adobe, and IBM. Many companies say it, but investment (and policies and systems) speak to whether a company is truly treating people as its most valuable asset. Unfortunately, the trend toward calling people "human capital" had the unfortunate consequence tended to make the whole endeavor less human. How are you investing in your people? To maintain your competitive advantage in today’s unpredictable environment, understanding the value of your employeesis a must. Let’s look at a brief history of human capital and how companies can invest in their most valuable asset. Each company has different types of assets that contribute to its total economic value. These include physical assets like land and equipment as well as cash. These also include intangible assets that are quantified on a balance sheet but harder to quantify in reality. One of the most important intangible assets that doesn't appear directly on the balance sheet is human capital. The definition of human capital is the economic value that a person, or group of people, brings to an organization based on their training, skills, loyalty, motivation, and well-being. These intangible qualities help companies produce and sell their goods or services. These things are hard to quantify, but there is an assumption that if a company is investing in the development and health and well-being of their people, they are investing in managing their human capital. And human capital is a key driver of a company's financial performance. Organizations that make an investment in human capitalimprove their productivityand profitability. When employees invest in their own education and training, they maximize their earning potential. So, what does human capital formation mean?
What is human capital?
Human capital formation is when an organization increases the number of people in their organization who have certain skills, education, and experience. This formation can happen through trainingor new hires.
What is human capital in economics?
Scottish economist Adam Smith first suggested the concept of human capital in the 18th century. He described human capitalas the “acquired and useful abilities of all the members of the society.”
He argued that human capital can be improved through education and training. This benefits the institutions of society. And it benefits the economic development of the entire economy.
It wasn’t until the 1950s that economists like Gary Becker and Theodore Schultz made human capital a popular concept in modern economics. Together, they created the Human Capital Theory.
The theory suggests that a person’s knowledge and skills are no different than any other form of capital. Investing in human capital increases economic output and an employee’s earning potential.
For this reason, Schultz and Becker encouraged people to invest in their education, emotional and physical health, and training.
Many criticized this theory. Critics argued that human beings shouldn’t be seen as just a means of production.
Schultz assured them that this wasn’t the intention of their theory. He explained that people who invested in their skills and education will live in better economic conditions and earn more.
A modern approach to the theory of human capital
What does human capital look like now?
Human capital isn’t like other assets. Land, for example, can be sold for a profit.
In contrast, people don’t sell their skills and talents. They enter into a contract with an employer and get paid to provide their expertise.
This is how German philosopher Karl Marx explained his version of human capital. He also pointed out that having human capital isn’t enough. People have to work and apply their skills to earn this income.
Today, human capital might include cultural, social, and intellectual capital. Let’s explore each one:
Cultural capital
The mix ofknowledge, emotional intelligence, and intellectual abilities a person has is known as cultural capital.
Companies and individuals can build their cultural capital by investing in higher education or professional development. The more they invest, the more efficient and profitable they’ll be.
Social capital
Social capitalis the network of relationships among peoplewho work and live in a society. This includes their relationships with one anotherand professional networks.
In a workplace, this can look like:
Companies with strong social capital have higher employee retentionand a culture of trust.
Intellectual capital
Intellectual capital is the value of the knowledge, skills, and innovative and creative ideasof the people within an organization. For example, Coca-Cola’s secret formula is a type of intellectual capital.
Types of human capital
Human capital has a huge impact on the economic growth of businesses and entire societies.
Take a guess, which of the following is an example of human capital?
- Education
In fact, all of these are human capital examples that drive growth.
How to invest in human capital
Just like any other capital resource, human capital is mobile. People can move to any company that values their skills and capabilities.
So how can you invest in your existing human capital and increase your retention rates?
Here are a few ways:
1. Invest in employee development
Traditionally an investment in human capital would include training. Training equips employees with the skills and confidence needed to achieve organizational goals. Investing inupskillingworkersincreases retention as well as their ability to create value. This is because people valueopportunities for growth and development.
Some ways to invest in employee training include:
- On-the-job training
- Technical skills training
- Soft skillstraining
- Corporate learning
But training is only one way, although it benefits from being visible and widely understood. Another important way to invest in employee development is to invest in personal growth and well-being, both of which are intricately connected to performance and professional growth. Ongoing coaching, wellness benefits, and growth opportunities provide real value to employees and also helps them perform better and more sustainably, creating value for the company.
2. Fund scholarships
Funding college or continuing education scholarships is a long-term investment in human capital.
By providing these scholarships, companies build relationships with both the current and future workforce. Employees of tomorrow must have access to higher education to increase their human capital.
3. Provide educational bonuses
Investing in employees' ongoing education is a sure-fire way to grow your human capital. One way to help employees upgrade their education is to provide incentives like educational bonuses.
These bonuses make it easier for employees to become more qualified in their roles, especially if they can’t afford to do so on their own.
Learning opportunities also help you keep your human capital from jumping ship. According to Linkedin,over 90% of employees would stay with a company longerif it invested in their learning.
4. Provide family assistance programs
Investing in human capital also means helping employees balance family responsibilities.Employee assistance programslike child care or eldercare assistance improvework-life balanceandsupport employee wellness.
A healthy work-life balancedecreases stressand increases workplace productivity andperformance.
Who is responsible for human capital within a business?
Human capital is the value each employee brings to an organization.
In medium-sized and large corporations, human resources (HR) is the department responsible for all employee-related matters, including human capital.
Human resource management (HRM), focuses on improving employee well-beingand performance. HRM also provides learning and development opportunities.
The strategic efforts of HRM aim to invest in and increase human capital. In small businesses like startups, the founder or head of people is usually the one in charge of people operations, depending on the size of the company.
At the same time, business departments or leaders aren’t the only ones who should be investing in human capital.
Each individual is responsible for growing their own skill set, education, and abilities. Having a high human capital makes you more competitiveand leads to higher compensation opportunities.
Human capital examples done rightPeople are a company’s greatest asset.
The following examples of human capitalshow how fostering it can benefit both individuals and an organization as a whole.
Let’s explore four companies that make human capital management a priority.
1. Johnson & Johnson’s culture of well-being
Johnson & Johnson (J&J) knows that health is one of the essential components of human capital. That’s why they’re an industry leader when it comes to thehealth and well-being of their employees.
Among an array of health perks,J&J offers employees a free course called Energy for Performance.
During this course, employees learn about foods and activities that are proven toboost energy. It also helps employees identify the most meaningful components of their lives.
The course led to increased employee productivity and reduced turnover rates.
Susan Podlogar, VP of Total Rewards, explains that “having your employees at their best andfully engagedis a business issue — it’s not just nice to have.”
2. Building human capital at IBM using AI
IBM invests in human capital byreskilling the workforce.
In 2019, IBMintroduced its SkillBuild platform. SkillBuildleverages AI technologyto provide students and adults looking for entry-level jobs the skills they need to qualify for emerging roles in technology.
This free program helps people from all walks of life increase their human capital. This includes refugees, veterans, and minimum wage employees.
With this initiative, IBM offers everyone an equal opportunity to build the skills and knowledge they need to qualify for a role in the IT industry.
3. Adobe’s employee growth and education
“Our people are our most important asset.”
That’s one of Adobe’sfundamental principles.
TheirLearning Fundprogram is one way they invest in their human capital. The program provides employees with up to $10,000 per year to pursue learning opportunities and academic degrees.
They also reimburse up to $1,000 per year to support learning and development opportunities. These include conferences, books, online courses, or webinars.
Adobe’s learning and development opportunities make it one of the most sought-after companies to work for today.
4. Google’s culture that drives innovation
Continuous innovation can’t be sustained with technology alone. Google, one of the most innovative companies in the world, understands this principle.
That’s why the tech giantfosters a culture of innovation.
One ofGoogle’s 8 Pillars of Innovationis “look for ideas everywhere,” where employees are encouraged to share their ideas openly.
Another pillar encourages Google employees tonot be afraidof failure. This encourages employees to take risks and put forward their innovative ideaswithout fear of failing.
Google invests in its human capital because it understands that people are the catalyst for growth and innovation.
How does human capital set you apart?
These human capital examplesput in perspective the power of our individual skills and abilities.
Human capital is one of the most important drivers of growth and innovation. Investing in employees’ training, education, and well-being also leads to a happy and engagedworkforce.
At BetterUp, we can help you invest in your workforce and increase your human capital.
Published September 29, 2021
