Human capital

July 27, 2023
10 MIN READ
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Intangible assets like human capital are not reflected in a company's financial statements. Human capital is often understood to include intangible assets such as an employee's knowledge and expertise. Because not all work is created equal, human capital may be increased by an organization's investment in its workers' education, training, and other perks. Human capital is often believed to be linked to economic development indicators like output and profitability. Human capital, like any other asset, may depreciate due to factors including lengthy periods of unemployment and falling behind the technological and intellectual curve.

What is human capital?

Human capital describes an individual's skills and abilities essential to production. Employee attributes such as education, health, and experience are included. It is the word social scientists use when discussing the monetary value of an employee's skills and experience. The skill, aptitude, education, talents, and information that an organization or country now has are all examples of human capital. It comprises a population's intangible assets, such as knowledge, skills, and networks. Human capital, in economics, refers to an individual's strengths that are seen as beneficial to a business.

Comprehending the human capital concept

Human capital is vital to a business since it is frequently claimed that an organization is only as effective as its members from the highest position down. A company's human resources (HR) department often administers it, which oversees staff acquisition, administration, and efficiency. Its other objectives are personnel planning and strategy, recruiting, staff development and training, and data analysis and reporting.

Human capital highlights that not all work is created equal. Employers, on the other hand, may increase the standard of that capital by investing in their personnel. It may be accomplished via staff education, experience, and talents. All of this has a significant economic impact on employers and the economy.

Human capital investments may be readily quantified since they depend on investing staff abilities and expertise via education. HR managers may compute overall profitability before and after making any investments. Any human capital's return on investment (ROI) may be computed by dividing the enterprise's total earnings by its entire human capital investments.

Particular considerations

Human capital migrates, particularly in global economies. As a result, there is often a migration from developing or rural regions to more developed and metropolitan areas. Some economists call this "brain drain" or "human capital flight." This term refers to how some places remain undeveloped while others grow more developed.

Economic growth and human capital

Human capital is closely associated with economic growth, which is why it may assist in enhancing the economy. It is because individuals bring a different range of talents and information. This link may be assessed by the amount of money invested in people's education. Some governments understand the existence of this link between human capital and the economy. Thus, they give free or low-cost higher education. People with greater education who work in the labor market often earn better wages, allowing them to spend more.

Education and human capital

Human capital research has proven to be a highly fruitful study area, having implications for individuals, corporations, and governments. The broad issue has sparked a great deal of research, with education serving as the primary emphasis.

Human capital is an important component of the productive foundation; education generates human capital resources for the economy and society. Education improves the quality of life in society by improving human capabilities, social norms, habits, and output. It is a nation's investment in education to foster economic success. The importance of investing in it for long-term growth cannot be emphasized.

Globally, schooling years are an important aspect of assessing human capital. A significant increase in the average years spent in formal education benefits a country's human capital. However, investing in education will be beneficial since it will improve job prospects, economic activity, and growth. Furthermore, education may improve economic and noneconomic benefits by increasing health and nutrition.

It makes a substantial contribution to economic growth and long-term development. There have been several methodological advances in estimating human capital stock. The current study quantifies costs, income, education, and health. Furthermore, it plays a major role in differences in firm ownership amongst groups regarding education and linguistic ability.

The concept of human capital

The human capital theory emphasizes increasing human productivity and efficiency by focusing more on education and training. Human capital is studied via the study of human resources. It addresses establishing economic value in light of how our society operates.

Becker (1962) and Rosen (1976) were the first to propose that each worker has abilities or talents. Training or education is required to improve or acquire such characteristics. As a result, managers must be able to educate, coach, and lead their people daily. They should act as a hub for workplace advice. And make every effort to maintain strong organizational, social, and operational abilities. Managers should try to understand how their team members work and help them enhance their skills.

This hypothesis holds that enough investment in people will result in economic progress. For example, numerous countries give free college education to their residents because they know that a more educated populace earns and spends more, stimulating the economy.

Although the main notion of this theory seems intriguing, it is not without problems. Individuals should invest in themselves, according to the human capital hypothesis. Many may contend that employees are first and foremost assets, whilst others find it distressing to be referred to as "business equipment" or corporate property.

Others argue that this method of capital development does not allow for accurate assessments of talents and skills. Employees cannot be evaluated or rewarded based on these intangibles. It may also lead to accusations of favoritism and prejudice in the workplace. While developing staff skill sets and capabilities is important, it is not enough to maintain a whole organization. Modern sociologists and anthropologists argue that the thesis is founded on too simplified assumptions.

Depreciation of human capital

Human capital, like any other asset, is subject to depreciation. It is often quantified regarding pay or the capacity to remain in the workforce. Human capital may depreciate in various ways, including unemployment, injury, mental deterioration, and an inability to keep up with innovation.

Consider an employee with a niche talent. They may be unable to maintain these levels of specialization if they are unemployed for an extended length of time. Their capabilities may no longer be in need when they return to work. Individuals' human capital may degrade if they are unable or unwilling to accept new technologies or procedures. On the other hand, the human capital of someone who does adopt them will.

How to boost human capital

1.     Education

Basic education to increase reading and numeracy impacts the foundation of human capital.

2.     Vocational education

Direct training for job-related skills such as electrical, plumbing, and nursing. A competent career needs specific vocational training.

3.     Infrastructure

An economy's infrastructure influences human capital. Good transportation, communication, mobile phone availability, and internet access are critical for developing human capital in emerging countries.

4.     Competitiveness

Individual ingenuity and entrepreneurship will likely suffer in an economy dominated by governmental monopolies. An environment that supports self-employment and company formation allows an economy to make better use of its potential human resources

5.     Specialization and labor division

Specialization enables people to focus on specialized activities and increases skill specialization. (However, specialization may lead to tedious, repetitive tasks and restricted worker skill growth.)

6.     A creative environment

An education encouraging pupils to think outside the box may boost human capital in ways that rote learning and memorizing information cannot.

The relevance of human capital

1.     Economic development and productivity

Long-term economic development is increasingly dependent on human capital upgrades. A more educated, imaginative, and creative workforce may contribute to higher labor productivity and economic development.

2.     Human capital emigration

Globalization and increased labor mobility have allowed skilled employees to transfer from low-income to higher-income nations. It may have a negative impact on emerging economies as they lose their greatest human resources.

3.     Raw resources are scarce

Economic development in resource-constrained nations such as Japan, Taiwan, and Southeast Asia. Count on a highly trained and imaginative staff to add value to raw materials throughout production.

4.     Unemployment caused by structural factors

Individuals with human capital unsuitable for contemporary businesses may struggle to get work. Rapid deindustrialization has left many manual workers unable to survive in a radically different labor market, a key challenge in contemporary economies.

5.     Employment quality

There is a growing disparity between low-skilled, low-paying transient work (gig economy) in today's economy. Workers with high competence and creativity have more chances for self-employment or favorable employment contracts.

Different perspectives on human capital

·       In his opinion, human Capital by Gary Becker (1964) is established by education, training, and medical care and is a means of production. Increasing human capital reflects the salary disparity for graduates. Human capital is essential in affecting economic development rates.

·       Howard Gardener explains the several sorts of human capital. Gardener highlighted the many sorts of human capital. One might have more schooling yet be a bad boss. A successful entrepreneur may have no formal schooling. Human capital is not a one-dimensional entity.

·       Schultz/Nelson-Phelps - adaptability. Human capital should be evaluated based on its adaptability. Can employees adjust to a changing labor market? A labor market in which full-time physical labor in manufacturing provides flexible employment in the service sector.

·       Spence Point of View - Observable human capital indicators, like schooling, serve primarily as signaling functions.

Human capital analysis

1.     Signaling

The concept that what comprises human capital is frequently just 'signaling' relates to the social capital of attending the right school. For instance, earning an Oxbridge degree raises one's standing in the workplace and allows the graduate to earn a greater wage. On the other hand, three years of studying contemporary history/PPE may provide a modest quantity of information directly connected to the work environment.

2.     Discrimination

Wage and job opportunity disparities are not always the consequence of variations in human capital but of discrimination, labor market flaws, or non-monetary advantages of occupations.

3.     Social education

Sociologist Pierre Bourdieu says human capital is highly tied to social upbringing. It impacts cultural, social, and symbolic kinds of capital. For example, Old Etonians and Oxbridge graduates develop confidence and social capital in the United Kingdom due to having the correct social networks.

The proponents of human capital concepts 

Many individuals in education and training have disagreed with the human capital hypothesis. During the 1960s, the idea was critiqued for defending bourgeois individualism, which many people saw as exploitative and self-centered. People from the middle class were included in the bourgeoisie and were stigmatized as exploiters of the working class. The notion was also accused of turning employees become capitalists and blaming them for systemic problems.

Human capital risk

Human capital risk is the difference between an enterprise's or the corporation's needs and its workforce's current human capital. This chasm may lead to inefficiency, failure to meet objectives, a negative image, fraudulent activity, financial loss, and final closure. A company should teach, nurture, and support its personnel to mitigate and eradicate human capital risk.

Conclusion

Human capital is defined as the reservoir of knowledge, talents, and other human characteristics held by people that contribute to their output; it indicates human beings' basic productive potential. Social scientists use this word to refer to the monetary value of a worker's knowledge and talents. Modern literature uses costs, income, education, and health to measure human capital. The human capital theory states that investing in people would lead to economic progress; nevertheless, it has been challenged for making simplistic assumptions and not measuring skills robustly.