What Is Human Capital?
The term human capital refers to the economic value of a worker's experience and skills. Human capital includes assets like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality. As such, it is an intangible asset or quality that isn't (and can't be) listed on a company's balance sheet. Human capital is perceived to increase productivity and thus profitability. The more investment a company makes in its employees, the chances of its productivity and success become higher.
Key Takeaways
- Human capital is an intangible asset not listed on a company's balance sheet.
- Human capital is said to include qualities like an employee's experience and skills.
- Since all labor is not considered equal, employers can improve human capital by investing in the training, education, and benefits of their employees.
- Human capital is perceived to have a relationship with economic growth, productivity, and profitability.
- Like any other asset, human capital has the ability to depreciate through long periods of unemployment, and the inability to keep up with technology and innovation.
Understanding Human Capital
An organization is often said to only be as good as its people from the top down, which is why human capital is so important to a company. It is typically managed by an organization's human resources (HR)department, which oversees workforce acquisition, management, and optimization. Its other directives include workforce planning and strategy, recruitment, employee training and development, and reporting and analytics.
The concept of human capital recognizes that not all labor is equal. But employers can improve the quality of that capital by investing in employees. This can be done through the education, experience, and abilities of employees. All of this has great economic value for employers and for the economy as a whole.
Since human capital is based on the investment of employee skills and knowledge through education, these investments in human capital can be easily calculated. HR managers can calculate the total profits before and after any investments are made. Any return on investment (ROI) of human capital can be calculated by dividing the company’s total profits by its overall investments in human capital.
For example, if Company X invests $2 million into its human capital and has a total profit of $15 million, managers can compare the ROI of its human capital year-over-year (YOY) in order to track how profit is improving and whether it has a relationship to the human capital investments.
Special Considerations
Human capital tends to migrate, especially in global economies. That's why there is often a shift from developing places or rural areas to more developed and urban areas. Some economists have dubbed this a brain drain or human capital flight. This describes the process that keeps certain areas underdeveloped while others become even more developed.
Human Capital and Economic Growth
There is a strong relationship between human capital and economic growth, which is why it can help boost the economy. That's because people come with a diverse set of skills and knowledge. This relationship can be measured by how much investment goes into people’s education.
Some governments recognize that this relationship between human capital and the economy exists, and so they provide higher education at little orno cost. People who participate in the workforce with higher education will often have larger salaries, which means they can spend more.
Does Human Capital Depreciate?
Like anything else, human capital is not immune to depreciation. This is often measured in wages or the ability to stay in the workforce. The most common ways human capital can depreciate are through unemployment, injury, mental decline, or the inability to keep up with innovation.
Consider an employee who has a specialized skill. If they go through a long period of unemployment, they may be unable to keep these levels of specialization. That's because their skills may no longer be in demand when they finally reenter the workforce.
An individual's human capital may depreciate if they can't or won't adopt new technology or techniques. Conversely, the human capital of someone who does adopt them will.
History of Human Capital
The idea of human capital can be traced back to the 18th century. Adam Smith referred to the concept in his book An Inquiry into the Nature and Causes of the Wealth of Nations, in which he explored the wealth, knowledge, training, talents, and experiences of a nation. Adams suggested that improving human capital through training and education leads to a more profitable enterprise, which adds to the collective wealth of society. According to Smith, that makes it a win for everyone.
In more recent times, the term was used to describe the labor required to produce manufactured goods. But the most modern theory was used by several different economists including Gary Becker and Theodore Schultz, who invented the term in the 1960s to reflect the value of human capacities.
Schultz believed human capital was like any other form of capital to improve the quality and level of production. This would require an investment in the education, training, and enhanced benefits of an organization's employees.
Criticism of Human Capital Theories
The theory of human capital has received a lot of criticism from many people who work in education and training. In the 1960s, the theory was attacked primarily because it legitimized bourgeois individualism, which was seen as selfish and exploitative. The bourgeois class of people included those of the middle class who were believed to exploit those of the working class. The theory was also believed to blame people for any defects that happened in the system and of making capitalists out of workers.
What are examples of human capital?
Examples of human capital include communication skills, education, technical skills, creativity, experience, problem-solving skills, mental health, and personal resilience.
What is the relationship between human capital and the economy?
Human capital allows an economy to grow. When human capital increases in areas such as science, education, and management, it leads to increases in innovation, social well-being, equality, increased productivity, improved rates of participation, all of which contribute to economic growth. Increases in economic growth tend to improve the quality of life for a population.
How can I increase my human capital?
Ways to increase your own human capital include more education, automating finances to improve efficiency, expanding your horizons outside of your social and workplaces, obtaining more experience, increasing participation in a multitude of activities or organizations, improving your communication skills, improving your health, and expanding your network.
What is human capital risk?
Human capital risk refers to the gap between the human capital requirements of a company or organization and the existing human capital of its workforce. This gap can lead a company towards inefficiencies, inability to achieve its goals, a poor reputation, fraud, financial loss, and eventual closure. To reduce and eliminate human capital risk, an organization should train, foster, and support its workforce.
FAQs
What Is Human Capital? The term human capital refers to the economic value of a worker's experience and skills. Human capital includes assets like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality.
What is the relationship between human capital and the economy? ›
Human capital and economic growth have a strong correlation. Human capital affects economic growth and can help to develop an economy by expanding the knowledge and skills of its people. Human capital refers to the knowledge, skill sets, and experience that workers have in an economy.
What are the different types of human capital in economics? ›
You can separate human capital into three types: knowledge capital, social capital, and emotional capital.
What is the definition of human capital in economics? ›
Human capital consists of the knowledge, skills, and health that people invest in and accumulate throughout their lives, enabling them to realize their potential as productive members of society.
What are 4 examples of capital in economics? ›
The four major types of capital include working capital, debt, equity, and trading capital.
What is the best example of capital in economics? ›
As we learned in this lesson, capital formation is the creation of capital, and capital are things that are used to create wealth and growth in an economy. Examples of capital are office buildings, computer systems, production machinery, and similar.
What are the economic benefits of human capital? ›
What Are Economic Benefits? Economic benefits are benefits that can be quantified in terms of money generated, such as net income, revenues, etc. It can also be money saved when discussing a policy to reduce costs. How one measures economic benefits really depends on what he is analyzing.
What are the characteristics of human capital in economic? ›
The characteristics of human capital can include experience, education, training, and health. It is important to invest in human capital as it is one of the most important aspect of business. Businesses can measure human capital in a variety of ways to make sure investments are paying off and value is being added.
What is the impact of human resource on economy? ›
Human resource refers to the people who are part of the workforce. The human resource plays a significant role in the economy of a country by contributing to productivity. The other resource becomes useful because of the input by the human resource.
What are 3 examples of natural human and capital economic resources? ›
Examples of natural resources are water, air, trees, minerals, and animals. Capital resources are man-made tools and equipment used to produce a product. Examples of capital resources are factories, equipment, and tools such as hammers, saws, and computers.
It is useful to differentiate between five kinds of capital: financial, natural, produced, human, and social. All are stocks that have the capacity to produce flows of economically desirable outputs. The maintenance of all five kinds of capital is essential for the sustainability of economic development.
What is human capital theory in economic development? ›
The theory of human capital is relatively new in finance and economics. It states that companies have an incentive to seek productive human capital and to add to the human capital of their existing employees. Put another way, human capital is the concept that recognizes labor capital is not hom*ogeneous.
What is the definition of human capital quizlet? ›
human capital. The knowledge, skills, and capabilities of individuals that have economic value to an organization.
Which of the following is an example of human capital in regards to the economy quizlet? ›
Which of the following is an example of the development of human capital? Conducting on-the-job training. Some economists argue that well-functioning capital markets that allow funds to move from those who have but do not need funds to those who need but do not have funds, are essential for rapid economic growth.
What are the 7 types of capital? ›
The seven community capitals are natural, cultural, human, social, political, financial, and built. Strong and resilient communities strive for balanced investments in these seven capitals.
What are the 4 types of capital structure? ›
One may use it to finance overall business operations and investment activities. The types of capital structure are equity share capital, debt, preference share capital, and vendor finance.
How is capital used in the economy? ›
In economics, capital refers to the assets—physical tools, plants, and equipment—that allow for increased work productivity. By increasing productivity through improved capital equipment, more goods can be produced and the standard of living can rise.
Is capital important in economy? ›
It increases the productivity of employees and in turn, the economy as a whole. Importance to technology and specialisation alongside a growing population has left manufacturers to arrange for more capital and allied resources to fulfil the demands. Capital accumulation is said to be the core of economic development.
What are the factors that determine human capital? ›
These factors are explained below.
- i. Education. Education not only raises the standard and quality of living but also encourages modern attitudes of people. ...
- ii. Health. There is a saying “The greatest wealth is health”. ...
- iii. On-the-Job Training. ...
- iv. Migration. ...
- v. Information.
In contrast, many economists today consider "human capital" (skills and education) as the fourth factor of production, with entrepreneurship as a form of human capital.
The Internal Revenue Service (the IRS—the government tax-collection agency), the U.S. Federal Reserve (the government producer of money), the National Bureau of Economic Research (a private research agency) are all examples of economic institutions.
What are human capital functions? ›
What are the functions of human capital management? HCM covers the basic functions of HR – payroll, time and attendance, and benefits administration – as well as aspects of workforce management, such as employee training, engagement and retention, and compliance.
How does capital formation affect economic growth? ›
Generally, the higher the capital formation of an economy, the faster an economy can grow its aggregate income. Producing more goods and services can lead to an increase in national income levels.
Why human resource is the most important factor in economic development? ›
Of all the factors of production, viz land, labour, capital and organisation, labour or human resource is the most important economic factor because it is the only factor which is active. All the other factors are inactive. In the absence of human resources, production in an economy will come to a standstill.
What is the impact of human development in economic development? ›
The development of its people is one of the principal objectives of an economy. To the ambit that greater capabilities and opportunities will improve the productivity of people, human development is also expected to have a positive influence on economic growth.
What are the 5 C's of human capital? ›
Engaging Employees Using 5C's: Care, Connect, Coach, Contribute & Congratulate.
What are the four pillars of human capital? ›
Talent management systems are generally considered to be consisting of four "pillars:" recruitment, performance management, corporate learning and compensation management.
What are the 4 types of economic resources? ›
Economists divide the factors of production into four categories: land, labor, capital, and entrepreneurship.
What are 3 types of economic resources? ›
How about:
- land (natural resources),
- labor (physical and mental talents of individuals, including management skills),
- capital (cash and manufactured items [e.g., tools and equipment] used to produce other products),
There are four economic resources: land, labor, capital, and technology. Technology is sometimes referred to as entrepreneurship. Natural resources that are used in the production of goods and services. Some examples of land are lumber, raw materials, fish, soil, minerals, and energy resources.
The three major sources of corporate financing are retained earnings, debt capital, and equity capital.
What are the 8 forms of capital? ›
The eight capitals: intellectual, financial, natural, cultural, built, political, individual and social. To build a region's wealth, WealthWorks considers not just financial assets, but includes the stock of all capitals in a region.
What is the ownership of human capital? ›
Human capital focuses on an individual's capabilities to produce future value. Capital owners make human capital investments in their workers, and workers also make human capital investments in themselves.
What is human capital definitions and approaches? ›
According to the managerial view human capital is a business resource or asset which forms part of the market value of the company. The macroeconomic approach sees human capital as one of the production factors, respectively sources of economic growth.
What are examples of human capital quizlet? ›
Know the definition of human capital and examples of human capital. the knowledge, skills, health, and values that individuals possess. Examples: Communication skills, license, being able to read, write, literacy... Know the definition of income.
What does human capital mean vs human resources? ›
Human capital refers to the skills, training, experience, education, knowledge, know-how, and competencies that are currently being contributed by humans to a business. Human resources are the pool of available human skills, knowledge and expertise which can be drawn on and developed when required.
What are examples of human capital and social capital? ›
Human capital includes explicit human capital (e.g., education level) and implicit human capital (e.g., internal knowledge and skills) (Luthans et al., 2015). Social capital includes interpersonal and group relationships, potential groups, community resources, and social structures (Luthans et al., 2015).
Which of the following is the best example of an investment in human capital? ›
Answer and Explanation: The correct answer is a; on-the-job training received by an apprentice electrician. Investment in human capital refers to investing on humans by ensuring that they are productive. On-the-job training implies adding more knowledge and skills to the electricians as human resources.
What is an example of a human capital strategy? ›
Some examples of human capital goals include retaining dedicated and hardworking employees, continuously develop skills of the workforce, developing realistic induction programs for new hires, and only hiring the very best talent in the pool.
What is an example of human and social capital? ›
Human capital includes explicit human capital (e.g., education level) and implicit human capital (e.g., internal knowledge and skills) (Luthans et al., 2015). Social capital includes interpersonal and group relationships, potential groups, community resources, and social structures (Luthans et al., 2015).
In economics, money is an example of capital. An economist would classify 100 shares of Apple Computers as capital.
What is human capital in one sentence? ›
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial impact on individual earnings.
What is working capital and human capital with examples? ›
Ex-Machines,Tools,etc. Working capital:Things or materials which can be used only once (as raw materials) in the production of goods are called working capital. Human capital: Human capital refers to the stock of skill, ability, expertise, education and knowledge in a nation. Hope it helps!!
Why is human capital strategy important? ›
Human capital management enables businesses with strategies to execute professional development programs and manage employee performance. Employees are looking for ways to improve their skills to develop within their organizations and careers.
Why is it important to have a human capital strategy? ›
A human capital strategy is a tool that helps you strategically manage your Human Resources by an effective talent acquisition for each position. For maximum success, your human strategic planning must combine each employee's skills with their active involvement in improving their team's performance.
What are 5 examples social capital? ›
Societal level examples of social capital
It is associated with trust, trustworthiness, civic norms, association membership, and voluntary activities. Examples include the institutions created to meet basic and fundamental needs for production, reproduction, regulation, and coordination.
What are the 4 types of social capital? ›
The different types of social capital are typically defined as structural social capital, cognitive social capital, and relational social capital. Another common categorisation of social capital is the following types: bonding social capital, bridging social capital, and linking social capital.
What are 2 examples of social capital? ›
What Is an Example of Social Capital? Social capital allows one to leverage information or resources among one's social connections. Asking a friend to borrow their car in a pinch, or finding out about a job opportunity from an old college classmate are both examples of social capital.
