What is Human Capital and Why Know About It

A woman wearing a mask knowledgeable on what is human capital.

Table of Contents

Human capital is a term used to describe the skills, knowledge, and experience of an individual. Employers invest in their employees by providing training, education, and benefits in order to improve human capital. In return for this investment, employers expect better productivity and higher levels of output from their staff members as well as economic growth and increased profitability for the company.

It recognizes that not all labor is the same. But businesses can enhance the quality of their human capital by investing in their employees—the experience, training, development, and education they get during employment have economic worth and value for both employer and worker.

The more you invest in your employees, the more of a success they will be. Human capital is required because it increases productivity and profitability for any company. For example, education improves their skills while training helps them broaden those skills for a more diverse workplace.

A company’s investment in its human capital can go far to improving both the business’ productivity and profit margins- or it could do just the opposite if there is not enough of an emphasis on these investments early on.

How to Measure Human Capital

Human capital can be measured in monetary terms as the total potential future earnings of the working-age population. However, this only captures part of human capital and is a limited measure since human capital also captures any intangible factors such as talent or creativity that might make an individual more valuable to society.

HR managers can measure the total revenue and profits prior to and after investments are completed. They do this by simply dividing their company’s total profit with its overall investment in human capital, as ROI for these sorts of things is typically calculated using a ratio to account for both parts costs and returns on investment.

For example, Company X can invest $2M into human capital then track and compare its ROI each year.

This way, they measure their success in relation to investments into their employees. This is an effective way for them to see if they are improving on a yearly basis or not.

Factors Affecting Human Capital

  • Work experience
  • Skills and qualifications
  • Education levels
  • Social skills
  • Professional personality
  • Habits and personality traits
  • Creativity
  • Intelligence
  • Judgment
  • Emotional quotient
  • Fame and branding of a person for celebrities
  • Geographical location

Human capital in the primary and secondary sector

All human capital is not created equal. The easiest human capital to measure is in manufacturing and agriculture. In these, “human capital” can be measured by an employee’s output per hour, which leaves us with a pretty good idea as to how much they are worth. But what if you’re mining coal? In this line of work, there may be no better indication for the human capital than their physical strength or volume produced on a daily basis.

Importance of Human Capital

Avoid Structural Unemployment

Structural unemployment is a major issue in modern economies. Rapid deindustrialization has left many manual workers struggling to thrive in an ever-changing labor market, which can be difficult for those whose human capital isn’t compatible with new employers and industries.

This is why it’s so important that human capital be nurtured and maintained. Investing in the development, training, and education benefits of your employees means they’ll stay on for longer––and you may have a leg up over those companies who haven’t invested as much into their workers’ lives at home or work.

Improved Quality of Employment

With the modern economy, there is an increasing divergence between low-skilled jobs that are typically temporary and those with high skills. The gig economy creates more opportunities for temporary workers but also opens doors to higher-skilled creatives who can choose self-employment or a good contract.

Better Economic Growth and Productivity

Modern humans are the best asset to a productive workforce. By providing them with better education, they can help increase labor productivity and economic growth for the long-term sustainability of our economy.

Human Capital Mobility

A global era of increased human capital has made it easier for people to move from developing countries with lower-paying jobs, such as India or the Philippines, and go work in higher-paying developed economies. This can have a negative impact on less wealthy nations who lose their best talent.

Effective Use of Raw Materials

High-skilled workers and raw materials are a competitive advantage in the global economy. Countries like Japan, Taiwan, and South East Asia rely on highly skilled labor to add value to their limited natural resources. This is why these countries need specialized workforce training programs that will help them produce goods at affordable prices for consumers around the world.

More Sustainability

Sustainability is one of the most important aspects that our society should focus on. We need to make sure that future generations are able to enjoy at least as many opportunities, or larger ones in comparison than we have had ourselves so they can grow and learn without limits.

Human Capital and Economic Growth

As a person with higher education, you can be more competitive in the workplace. In terms of economic growth and development, human capital is vital because it provides diverse skillsets that are indispensable to any company’s success. This relationship between human capital and economic growth has been found by examining how much investment goes into people’s education through government initiatives—those who participate in the workforce have an increased possibility for larger salaries which enable them to spend more on goods or services as well.

Moreover, higher education is valuable, so many governments provide it at little or no cost. In return, people with higher degrees often make more money and can spend the extra cash on other goods and services that will fuel our economy.

History of Human Capital

The concept of human capital started in the 18th century. Adam Smith called it that n his book “An Inquiry into the Nature and Causes of Wealth,” where he examined how knowledge, training, experience, and talent affect a nation’s wealth. According to Smith, improving your own human capital by investing time in education or training will lead you towards success—which benefits everyone involved.

The term “human capital” refers to the value of human capacities and was first conceived in 1960 by two economists: Becker and Schultz. They were looking for a way to quantify this intangible measure when they decided that it would be best represented as time spent on education or employment which could result in an increase in wages.

Schultz believed that a company’s investment in their employees should be similar to other forms of capital, such as investing money into buildings. To do this requires an investment in education and training for individual workers within the organization, which will result in higher quality work and production levels.

The Harvard economist Richard Freeman said that human capital was a sign of ability and talent. He claimed so for businesses to become productive, they required to train their stakeholders and employees along with invest in expensive equipment. What he found is not shared by all economists though; according to them, the quality of labor should be valued more than costly machines or tools which can only do so much on their own.

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