When you teach somebody, they and society both benefit. What's in it for you?
Key points
Almost universally, economists agree that it is a good individual decision to invest time and money into education.
Society also benefits from education—better health outcomes for the population; lower levels of crime; a cleaner environment; and a more stable, democratic government are positive externalities of investment in education.
Private rates of return go primarily to an individual; for example, earning interest on a savings account.
Social rates of return go primarily to society; for example, providing free education.
Why invest in human capital?
Investment in anything—whether it is the construction of a new power plant or research in a new cancer treatment—usually requires a certain upfront cost with an uncertain future benefit. The investment in education, or human capital, is no different.
Private benefits of education
Think of a student. Over the span of many years, she and her family invest significant amounts of time and money into her education. Their hope is that higher levels of educational attainment will eventually serve to increase the student’s future productivity and subsequent ability to earn. Once the numbers are crunched, does this investment pay off for the student?
Almost universally, economists have found that the answer to this question is a clear yes. For example, several studies of the return to education in the United States estimate that the rate of return to a college education is approximately 10%. The table below—showing data from the US Bureau of Labor Statistics’ Usual Weekly Earnings of Wage and Salary Workers, Third Quarter 2014—demonstrates that median weekly earnings are higher for workers who have completed more education. While these rates of return will beat equivalent investments in Treasury bonds or savings accounts, the estimated returns to education go primarily to the individual worker, so these returns are private rates of return to education.
Usual weekly earnings of wage and salary workers, third quarter 2014 | Less than a high school degree | High school degree, no college | Bachelor’s degree |
|---|
| Median weekly earnings, full-time workers over the age of 25 | $488 | $668 | $1,101 |
Social benefits of education
But what does society gain from investing in the education of a student? After all, if the government is spending taxpayer dollars to subsidize public education, society should expect some kind of return on that spending. Again, economists have found that, across a variety of nations, the social rate of return on schooling is also positive.
Positive externalities exist from investment in education. These positive externalities are not always easy to measure, but according to Walter McMahon, the positive externalities to education typically include better health outcomes for the population, lower levels of crime, a cleaner environment, and a more stable, democratic government. For these reasons, many nations have chosen to use taxpayer dollars to subsidize primary, secondary, and higher education.
Education clearly benefits the person who receives it, but a society where most people have a good level of education provides positive externalities for all.
FAQs
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.
What does investment in human capital mean? ›
When money is spent on education, training or health care, economists call that 'investments in human capital. ' Investment in human capital improves the productivity of the labor force and leads to economic growth. Countries that invest more in human capital will grow faster.
What is financial and human capital? ›
The capital that businesses obtain from their personnel is known as Human Capital. It does not, however, have a monetary worth. On the other hand, financial capital is the capital that businesses obtain from financial sources.
What is the definition of human capital for kids? ›
“Human capital” is defined as the combination of knowledge, skills and abilities personal characteristics, and experience a person has.
What is the best way to invest in human capital? ›
Training and education are among the most important investments in human capital construction companies can make. It's also one of the most crucial parts of the human capital planning process.
Who should invest in human capital? ›
The concept of human capital investment is mainly investment done by a firm or an individual on education/training and to expect a return of that investment in terms of revenue/capital. Human capital consists of three main components: ability, earlier education, and knowledge gained by training on job premises.
Who benefits from human capital? ›
Employees have better control over their jobs thanks to human capital management. It uses teaching, assessments, performance reviews and many other forms of evaluation to identify skill shortages, allowing employees to foster their career development plans and personal goals.
What is an example of investing in human capital by a company? ›
Examples of investments in human capital include workers' training, funding the employee's college scholarships, and providing support in learning new skills and knowledge.
What are the 3 kinds of human capital? ›
Human capital can be made up of several factors, including: Hard skills and soft skills. Higher education and training. Intelligence and emotional intelligence.
What is human capital vs HR? ›
Human Resource Management focuses on managing employee-related processes, such as recruitment, payroll, and compliance. On the other hand, Human Capital Management emphasizes maximizing employee potential by developing their skills and talents to achieve organizational goals.
Investment in education and on-the-job training helps to impart these skills and enhance the knowledge base and thus helps in the absorption of new technologies which leads to higher production and thus economic growth. Thus it is evident that human capital contributes to economic growth in various ways.
How does human capital affect economic growth? ›
Human capital affects economic growth and can help to develop an economy by expanding the knowledge and skills of its people. The level of economic growth driven by consumer spending and business investment determines the amount of skilled labor needed.
Is human capital a risky asset? ›
Like any other asset class, there are risks associated with your human capital. The two main risks are death or disability risk, and professional competency risk.
Why is human capital risky? ›
This risk stems from a lack of hiring diligence and can decrease a company's retention rate, increase complacency, and taint the company's culture. In the worst case scenario, it can endanger other employees, management, and the firm. All of the above-mentioned factors lead to the primary human capital risk: turnover.
What is the rate of return on human capital investment? ›
Human capital ROI (HCROI) is a strategic HR metric that reflects the financial value added by the workforce as a result of the money spent on employees (in terms of recruiting, employee compensation, talent management, training, etc.).
What are the disadvantages of human capital? ›
The disadvantages are that the notion of human capital can be pushed too far and think that every remuneration difference is due to human capital. We cannot always assume that the differences in the pay of the employees are related to skill but it can be due to other reason.
