What Is Human Capital?
Let me explain human capital directly: it's the economic value that comes from a worker's experience and skills. You can think of it as being boosted by things like education, training, intelligence, health, and even traits employers prize, such as loyalty and punctuality. As an intangible asset, it doesn't show up on a company's balance sheet, but it's seen as a key driver of productivity and profitability.
Key Takeaways
- Human capital is an intangible asset not listed on a company's balance sheet.
- Employers can improve human capital by investing in employee training, education, and benefits.
- Human capital is perceived to add to a company's growth, productivity, and profitability.
Theories of Human Capital
Back in the 18th century, economist Adam Smith touched on this in his book 'An Inquiry into the Nature and Causes of the Wealth of Nations,' where he discussed a nation's wealth through knowledge, training, talents, and experiences. He argued that improving human capital via training and education makes enterprises more profitable.
Then in the 1960s, economist Theodore Schultz delved into the value of human capacities, comparing it to other capital that elevates production quality and levels. He stressed that companies need to invest in their employees' education, training, and benefits.
I've noted criticism of terms like 'human capital' and 'human resources' because they can make employees sound like just another resource, similar to utilities or tech. Some organizations, like ADP, suggest using 'associates' or 'people' to avoid that impersonal vibe, recognizing that these are individuals with lives outside work.
Investing In Employees
Your organization's HR department typically handles employees, managing acquisition, oversight, and optimization. This includes workforce planning, recruitment, training, development, and analytics.
Since human capital revolves around enhancing skills and knowledge through education, you can calculate these investments straightforwardly. The ROI for human capital comes from dividing total profits by investments in it, and this holds significant economic value for employers and the broader economy.
If a company invests in improving employees and sees profits rise, you can track year-over-year ROI to see how it ties to workforce investments. Importantly, job skills gained through employer training can account for 46% of an average employee's lifetime earnings.
Human Capital and Economic Growth
There's a clear connection between human capital and economic growth. Companies that invest in their people retain talent and achieve consistent earnings over competitors. Workers with higher education often earn more, spending it back into the local economy.
But human capital isn't immune to depreciation, which shows up in lower wages or workforce exit. Common causes include unemployment, injury, or losing a specialized skill.
In global economies, human capital migrates, often from developing or rural areas to urban or developed ones. Economists call this brain drain or human capital flight, which keeps some regions underdeveloped while others advance.
What Improves Human Capital Retention?
To boost retention, employers should focus on training and education in areas like communication, technical skills, problem-solving, and health benefits.
Why Is It Difficult to Quantify Human Capital?
Quantifying human capital isn't straightforward like measuring debt or equity; it's more akin to intellectual property. It's typically assessed by the skills within a company's workforce.
What Is Workforce Risk?
Workforce risk is the gap between what a company needs in employee skills and what's actually available, impacting operational and financial performance.
The Bottom Line
In essence, human capital is the economic value of workers' abilities and skills. Companies can build it through recruitment, training, and management techniques that maximize existing workers' productivity. This responsibility usually falls to the HR department to maintain and enhance it.
Other articles for you
International Accounting Standards (IAS) were replaced by International Financial Reporting Standards (IFRS) in 2001, which are now widely adopted globally except in major markets like the US, China, and Japan.
Cost per click (CPC) is an online advertising model where you pay only when users click on your ads, helping drive targeted website traffic.
Keynesian economics advocates for government intervention through spending and policies to stabilize economies during recessions.
A limit order book is a record of outstanding limit orders for securities maintained by exchange specialists.
Brain drain refers to the loss of skilled professionals from regions, organizations, or industries due to better opportunities elsewhere, leading to economic and expertise shortages in the areas left behind.
A distribution-in-kind is a non-cash payment using securities or property, often for tax benefits in investments, inheritances, and retirements.
The Iranian Rial (IRR) is Iran's official currency, marked by historical fluctuations, economic sanctions, and discussions of replacement with the toman.
A Limited Liability Company (LLC) is a U.S
Neural networks are algorithms mimicking the human brain to recognize data patterns, widely used in finance for tasks like forecasting and fraud detection.
Interest rate options are derivatives allowing investors to hedge or speculate on interest rate changes, similar to equity options but based on bond yields.