What is Human Capital?
The term and theory of “Human Capital” gained popularity in the 1960s through studies by Gary Becker and Theodore Schultz, who considered the economic valuation of intangible human resource capabilities from which the business can benefit. According to Becker, capital investment intangible assets was no different from investment in human resources, which is critical for a competent production process.
The term, however, originated in the 1800s in the book “An Inquiry into the Nature and Causes of the Wealth of Nations” by Adam Smith. Smith examined a nation’s wealth, knowledge, training, skills, and experiences. He further proposed that increasing human capital through training and education results in a more lucrative company, contributing to society’s collective wealth.
Hence, human capital is a term used by economics and social scientists to denote personal characteristics that are considered valuable in the production process. It includes, but is not limited to, staff knowledge, skills, technical expertise, excellent health, and education. The economic value of a worker’s knowledge and skills is referred to as “human capital.”
Human capital is an intangible asset or attribute that does not appear on an organization’s statement of financial position. It is believed to enhance productivity and, consequently, profitability. The more an organization invests in its personnel, the more likely it is to be productive and successful.
- Human capital is a phrase used by economists and social scientists to describe individual characteristics that are deemed valuable in the production process. It includes, but is not limited to, staff knowledge, skill, technological competence, good health, and a good education.
- The idea gained prominence in the 1960s as a result of studies by Gary Becker and Theodore Schultz, who looked at the economic assessment of intangible human resource qualities that businesses might profit from.
- Human capital may depreciate in a variety of ways, including unemployment, injury, mental decline, and challenges in keeping up with technological improvements and innovation.
Understanding Human Capital
Organizations prefer to invest in specialized human capital, whereas individuals prefer to pay for generic human capital investments. Organizations are justifiably hesitant to invest in employees who may be poached by competitors.
An example can be seen at a restaurant. A fine dining establishment would likely be interested in improving the expertise of specialized cooks for particular cuisines. Taking into consideration that an investment of such nature should benefit the fine dining restaurant as a whole, a long-term return on investment would only be possible if such a chef is retained for several years and is not poached by competitors.
The “human capital” theory acknowledges that not all work is created equal. Therefore, employers may increase the quality of that capital by investing in their personnel. It can be accomplished through staff education, experience, and skills. They provide a significant economic impact on employers, organizations, and the economy as a whole.
Human capital is often administered in organizations by their human resources (HR) department, which coordinates staff acquisition, supervision, and development. Personnel planning and strategy, recruitment, training and development, and reporting and analytics are among the department’s other objectives.
Depreciation of Human Capital
Human capital may depreciate in several ways, including unemployment, injury, mental deterioration, and difficulties associated with keeping up with technological advancements and innovation. This is frequently quantified in terms of wages or the capacity to remain in the workforce.
Quantifying Human Capital ROIs
Human resources departments may compute overall earnings both before and after any investments are made.
Human capital investments can be simply quantified and calculated since they are based on the investment in employee skills and knowledge through training. Any human capital return on investment (ROI) may be determined by dividing the corporation’s total earnings by its total investments in human capital.
Determinants of Human Capital
Various factors can be considered when determining the value of human capital. They can be summarized as (but may not be limited to):
- Communication skills
- Higher education
- Working intelligence
- Technical and non-technical qualification
- Capacity of judgment
- Innovation in approach towards work
- The brand worth of an individual, e.g., a celebrity who is paid for an endorsement
Human capital is much easier to quantify in industries such as agriculture and manufacturing since straightforward productivity measures are used. Individual abilities and attributes are increasingly difficult to define in the knowledge-based ecosystem.
For example, the human capital of a management professor cannot be judged only by their academic background. A highly educated professor may not be able to connect with his students, diminishing their efficacy.
Thank you for reading CFI’s guide to Human Capital. To keep advancing your career, the additional CFI resources below will be useful: