History
of Human Capital
The idea of human capital can be traced back to the 18th century. Adam Smith referred to the concept in his book "An Inquiry into the Nature and Causes of the Wealth of Nations," in which he explored the wealth, knowledge, training, talents, and experiences of a nation. Adams suggested that improving human capital through training and education leads to a more profitable enterprise, which adds to the collective wealth of society. According to Smith, that makes it a win for everyone.1
In more recent
times, the term was used to describe the labor required to produce manufactured
goods. But the most modern theory was used by several different economists
including Gary Becker and Theodore Schultz, who invented the term in the 1960s to reflect the value
of human capacities.2
Schultz believed human capital was like any other form of capital to
improve the quality and level of production. This would require an investment in the education,
training, and enhanced benefits of an organization's employees.3
But not all economists agree. According to Harvard economist Richard
Freeman, human capital was a signal of talent and ability. In order for a
business to really become productive, he said it needed to train and motivate
its employees as well as invest in capital equipment. His conclusion was that
human capital was not a production factor.
The Concept of
Human Capital
Traditionally,
employees were viewed as part of the cost of doing business rather than as part
of the business's capital. The wages or salaries paid to employees, and the
costs of any employee benefits were considered business expenses. The concept
of human capital, which began to be developed in about 1960, offers a new way
for companies to view their employees.
The
idea of human capital is to see the workforce as a capital asset of the
company, similar to traditional physical capital assets like buildings,
machinery, and office equipment.
The workforce is not an expense but rather a
capital asset that adds to productivity.
Human
capital is an imprecise term that can be defined as the combined knowledge and
abilities of the employees and business owners that contribute to productivity
and profits.
In
describing human capital attributes, various terms may be used, including
experience, intelligence, creativity, talent, education, skills, expertise,
judgment, and wisdom. The individual personality and habits of employees can
also fit into the equation.
What Is Human Capital?
The term human capital refers to
the economic value of a worker's experience and skills. Human
capital includes assets like education, training, intelligence, skills, health,
and other things employers value such as loyalty and punctuality. As such, it
is an intangible asset or quality that isn't (and can't be) listed on a
company's balance sheet. Human capital is perceived to increase
productivity and thus profitability. The more investment a company makes in its
employees, the chances of its productivity and success becomes higher.
Understanding Human Capital
An organization is often said to
only be as good as its people from the top down, which is why human capital is
so important to a company. It is typically managed by an organization's human resources (HR) department, which oversees
workforce acquisition, management, and optimization. Its other directives
include workforce planning and strategy, recruitment, employee training and development, and reporting
and analytics.
The concept of human capital
recognizes that not all labor is equal. But employers can improve the quality
of that capital by investing in employees. This can be done through the
education, experience, and abilities of employees. All of this has great
economic value for
employers and for the economy as a whole.
Since human capital is based on the
investment of employee skills and knowledge through education, these investments in human capital can be easily calculated.
HR managers can calculate the total profits before and after any investments
are made. Any return on investment (ROI) of human capital can be calculated by
dividing the company’s total profits by its overall investments in human
capital.
Importance
Of Human Capital
- Structural unemployment.
Individuals whose human capital is inappropriate for modern employers may
struggle to gain employment. A major issue in modern economies is that
rapid industrialization has left many manual workers, struggling to
thrive in a very different labour market.
- Quality Of Employment. In the modern economy, there is increasing divergence
between low-skilled, low-paid temporary jobs (gig economy). High-skilled
and creative workers have increased opportunities for self-employment or
good employment contracts.
- Economic Growth And
Productivity.
Long-term economic growth
depends increasingly on improvements in human capital. Better educated,
innovative and creative workforce can help increase lab our productivity
and economic growth.
- Human Capital Flight.
An era of globalization and greater movement of workers has enabled
skilled workers to move from low-income countries to higher income
countries. This can have adverse effects for developing economies who lose
their best human capital.
- Limited Raw Materials. Economic growth in countries with limited natural
resources, e.g. Japan, Taiwan and South East Asia. Rely on high-skilled,
innovative workforce adding value to raw materials in the manufacturing
process.
- Sustainability ”what we leave to future generations; whether we leave
enough resources, of all kinds, to provide them with the opportunities at
least as large as the ones we have had ourselves” (UN, 2012)
Factors that determine human capital
- Skills and
qualifications
- Education
levels
- Work experience
- Social skills –
communication
- Intelligence
- Emotional
intelligence
- Judgement
- Personality –
hard working, harmonious in an office
- Habits and
personality traits
- Creativity.
Ability to innovate new working practices/products.
- Fame and brand
image of an individual. e.g. celebrities paid to endorse a product.
- Geography –
Social peer pressure of local environment can affect expectations and
attitudes.
2.
.
How does human capital affect organizations?
Every company is what it is because of its employees.
Individuals who make up a company’s workforce are responsible for its success
or failure.
Think of it this way. If your organization employs people
who have more education, more developed skills, and more work experience, it’ll
be able to accomplish much more.
A higher human capital means employees are more capable
of doing their job. But it also means they can innovate and find creative
ways to solve a crisis.
They’ll also be able to do their job more
efficiently if they have higher human capital.
That’s because they probably have more experience doing
the job. But they can also achieve efficiency because of their rich life
experience. This experience gives them a wider perspective on their problems.
Keep in mind that human capital can migrate from one
place to another. Companies that don’t do what it takes to retain human capital
can experience a "brain drain."
Brain drain describes the phenomenon that occurs when
human capital migrates from developing areas to urban and developed areas.
The same can happen to companies if they don’t value
their employees. Data from an MRI network study shows that 25% of
employees leave their job to seek more compensation.
You can also lose human capital if you don’t give
advancement opportunities. 30% of employees leave their job due to a lack of
career advancement, according to the same survey.
Furthermore, human capital has a huge impact on the
success of not just an individual company, but also the economy.
For example, according to the Human Capital Index, 80% of
the world’s poor live in economies with a human capital index under 0.5.
Developing and Managing Human Capital
Just
as a company can invest in physical capital such as buildings or machinery, a
company can invest
in human capital. Human
capital development, also called human capital management, involves creating
systems and practices to attract and hire new employees and retain them. This
includes:
- Recruiting
and hiring employees
- Training
employees
- Monitoring
and analyzing employee effectiveness and efficiency
- Retaining
employees through factors such as work environment and employee benefits
Creating
and fostering a good workplace environment encompasses many factors, such as
flexible working hours, giving employees input in decision-making and
problem-solving, performance bonuses and other expressions of appreciation,
communication between employees and managers, company social activities and
events, and a company culture that values a balance between work and personal
time. In short, the idea is that a happy employee is a productive and loyal
employee.
In
larger companies, developing and managing human capital is typically done by
a human
resources (HR) department,
sometimes called a human capital management (HCM) department. The HR department
may have several employees. In smaller businesses, this responsibility
generally falls to one or more of the owners.
Measuring Human Capital
Recognizing
that the workforce contributes value to the company is one matter. Measuring
that contribution is something quite different. Unlike the tangible physical
capital of a building, a fleet of trucks, machinery, office computers, and
desks, human capital is intangible. Measuring it is difficult, if not
impossible. But that hasn't stopped some from trying to do so.
The
idea is that you compare the company's profits both before and after
implementing a human capital management program. This looks good in theory, but
at least some of the improvement in profits may be due to other factors, such
as improving products or services, marketing efforts, business expansion, or
other companies' acquisition.
Also,
human capital really belongs to the employee, not to the company. If an
employee leaves the company, her part of the human capital leaves too.
Depending upon the nature of the job and the ability of the person leaving,
this can have anywhere from a minimal to a devastating effect on the company.
While
today's businesses tend to view their employees as assets rather than as
expenses, the concept of human capital is still evolving. Even though it may be
difficult to quantify, developing, and managing the human capital of your
business is important to success.
