Human Capital

The sum total of intangible worker assets and qualities that have a direct bearing on productivity

What is Human Capital?

Human capital is basically a measure of the education, skills, and other production attributes of a human resource that can influence its productivity and potential.

 

Human Capital

 

Gary Becker and Theodore Schultz came up with the theory of human capital in the 1960s. They considered the economic valuation of intangible human resource capabilities from which the business can benefit. According to Becker, capital investment in tangible assets was no different from investment in human resources, which is critical for a competent production process.

Becker further subdivides human capital into specific human capital and general human capital.

 

Summary

  • Human capital is the total of intangible worker assets and qualities that directly impact productivity.
  • It refers to skills and competencies acquired over a working life that can be put to cognizable use for the production of goods and services.
  • Human capital can also be quantified in terms of intellectual understanding gathered over the working life of an individual worker.

 

Understanding Human Capital

Organizational inclination is towards investment for specific human capital, while individuals prefer paying for general human capital investments. Understandably, corporations are less inclined to invest in workers who might then be taken away by competitors.

For example, a fine dining restaurant would definitely be interested in upgrading the skills of specialized chefs for specific cuisines. Keeping in mind that such investment should benefit the fine dining restaurant in totality, there would only be a long-term return on investment if such a chef remains for several years and is not poached by the competition.

Since greater earning potential and increased ability to make wealth is generated, investment in human capital benefits the economy and not just the individual human resource.

There is also a key role to be played by human capital in the economy of any country. The national education standards can determine the level of human capital of the country. To put it in figures, the total potential future earnings of the working population can be measured in monetary terms.

 

Determinants of Human Capital

Various factors determine human capital. They are:

  • 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

 

It is considerably easier to measure human capital in sectors like agriculture and manufacturing since simple terms of productivity are considered.

In the knowledge-based ecosystem, individual skills and qualities are more difficult to quantify; for example, the human capital of a management professor cannot be measured simply by his or her academic background. A highly educated professor may not relate well with the students, thereby reducing his effectiveness.

Human capital can be increased by encouraging specializations that allow human resources to achieve mastery over specific tasks, education, various skill-based and vocational training, and competitiveness.

 

Research of Matthias Regier and Ethan Rouen

Research in human capital is an evolving process, and a recent study by Matthias Regier and Ethan Rouen looks at the importance of understanding the complex relationship matrix between expenditures on employees and company performance from the perspective of managers. The research delves into examining human capital investment, which is embedded in a company’s human resource expense.

The two researchers also developed measures of company-level human capital creation from publicly disclosed personnel expenses. They contrasted the same with the stock market performance.

They were able to show that efficacy is definitely linked with features of human capital-intensive companies and growth in the productivity of employees. The result of their research showed the importance of evaluating accurate human capital measurement.

 

Related Readings

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Human Resource Management
  • Knowledge Capital
  • Human Development Index
  • Endogenous Growth Theory

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