Human Capital

Encyclopedia Britannica defines Human Capital as "intangible collective resources possessed by individuals and groups within a given population. These resources include all the knowledge, talents, skills, abilities, experience, intelligence, training, judgment, and wisdom possessed individually and collectively, the cumulative total of which represents a form of wealth available to nations and organizations to accomplish their goals." Human capital is available to generate material wealth for an economy or a private firm. In a public organization, human capital is available as a resource to provide for the public welfare. How human capital is developed and managed may be one of the most important determinants of economic and organizational performance.[1]

Economist Theodore Schultz invented the term "human capital" in the 1960s to reflect the value of human capacities. He believed human capital was like any other type of capital; it could be invested in through education, training and enhanced benefits that lead to an improvement in the quality and level of production. An organization is often said to only be as good as its people. Directors, employees and leaders that make up an organization's human capital are critical to its success. Human capital is typically managed by an organization's human capital management (HCM) department, commonly referred to as the human resources (HR) department. A HCM department oversees the organization's workforce acquisition, management and optimization. The HCM department's other directives include workforce planning and strategy, recruitment, employee training and development, and reporting and analytics. Human capital tends to migrate, especially in global economies. That is why you will see a shift of this type of capital from developing places or rural areas to more developed and urban areas. Some economists have dubbed this a "brain drain" — making poorer places poorer and richer places richer.[2]

Human Capital
source: MBN

Importance of Human Capital[3]

  • 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 deindustrialisation 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 labour productivity and economic growth.
  • Human capital flight. An era of globalisation 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)

Kinds of Human Capital[4]
There are two kinds of human capital: general and specific.

  • General: this refers to knowledge and skills that several different employers find useful. Examples include expertise in accountancy, marketing, or personnel management.
  • Specific: skills that only one employer might be interested in. For example, John Doe Cranes Inc. has proprietary equipment that can only be operated by people with special training. Therefore, those with that training will only be of interest to John Doe Cranes Inc. Additionally, people with those skills will just be interested in crane companies.

Human resource development, part of human resource management, involves training and developing employees. It is an important factor in maintaining competitiveness. Warren Buffett, an American business magnate, investor, and philanthropist, said the following: “Investing in yourself is the best thing you can do. Anything that improves your own talents, nobody can tax it or take it away from you.” “They can run up huge deficits and the dollar can become worth far less. You can have all kinds of things happen.” “But if you’ve got talent yourself, and you’ve maximized that talent, you’ve got a tremendous asset that can return ten-fold.”

The Constituents of Human Capital[5]
Human capital consists of intellectual, social and organizational capital.

  • Intellectual Capital: The concept of human capital is associated with the overarching concept of intellectual capital, which is defined as the stocks and flows of knowledge available to an organization. These can be regarded as the intangible resources associated with people which, together with tangible resources (money and physical assets), comprise the market or total value of a business. Bontis (1998) defi nes intangible resources as the factors other than financial and physical assets that contribute to the value-generating processes of a firm and are under its control.
  • Social Capital: Social capital is another element of intellectual capital. It consists of the knowledge derived from networks of relationships within and outside the organization. The concept of social capital has been defi ned by Putnam (1996) as ‘the features of social life – networks, norms and trust – that enable participants to act together more effectively to pursue shared objectives’. It is important to take into account social capital considerations, that is the ways in which knowledge is developed through interaction between people. Bontis et al (1999) point out that it is flows as well as stocks that matter. Intellectual capital develops and changes over time and a signifi cant part is played in these processes by people acting together.
  • Organizational Capital: Organizational capital is the institutionalized knowledge possessed by an organization that is stored in databases, manuals, etc (Youndt, 2000). It is often called ‘structural capital’ (Edvinson and Malone, 1997), but the term ‘organizational capital’ is preferred by Youndt because, he argues, it conveys more clearly that this is the knowledge that the organization actually owns.

The Significance of Human Capital Theory[6]
The added value that people can contribute to an organization is emphasized by human capital theory. It regards people as assets and stresses that investment by organizations in people will generate worthwhile returns. Human capital theory is associated with the resource-based view of the fi rm as developed by Barney (1991). This proposes that sustainable competitive advantage is attained when the fi rm has a human resource pool that cannot be imitated or substituted by its rivals. Boxall (1996) refers to this situation as one that confers ‘human capital advantage’. But he also notes (1996, 1999) that a distinction should be made between ‘human capital advantage’ and ‘human process advantage’. The former results from employing people with competitively valuable knowledge and skills, much of it tacit. The latter, however, follows from the establishment of difficult to imitate, highly evolved processes within the firm, such as cross-departmental cooperation and executive development. Accordingly, ‘human resource advantage’, the superiority of one firm’s labour management over another’s, can be thought of as the product of its human capital and human process advantages

Human Capital Theory: Questions On People Management[7]

  • What are the key performance drivers that create value?
  • What skills do we have?
  • What skills do we need now and in the future to meet our strategic aims?
  • How are we going to attract, develop and retain these skills?
  • How are we going to attract, develop and retain these skills?
  • How can we develop a culture and environment in which organizational and individual learning takes place that meets both our needs and the needs of our employees?
  • How can we provide for both the explicit and tacit knowledge created in our organization to be captured, recorded and used effectively?

Criticism of Human Capital Theory[8]
The concept of human capital can be infinitely elastic, including unmeasurable variables such as personal character or connections with insiders (via family or fraternity). This theory has had a significant share of study in the field proving that wages can be higher for employees on aspects other than human capital. Some variables that have been identified in the literature of the past few decades include, gender and nativity wage differentials, discrimination in the work place, and socioeconomic status. The prestige of a credential may be as important as the knowledge gained in determining the value of an education. This points to the existence of market imperfections such as non-competing groups and labor-market segmentation. In segmented labor markets, the "return on human capital" differs between comparably skilled labor-market groups or segments. An example of this is discrimination against minority or female employees. Following Becker, the human capital literature often distinguishes between "specific" and "general" human capital. Specific human capital refers to skills or knowledge that is useful only to a single employer or industry, whereas general human capital (such as literacy) is useful to all employers. Economists view firm-specific human capital as risky, since firm closure or industry decline leads to skills that cannot be transferred (the evidence on the quantitative importance of firm specific capital is unresolved). Human capital is central to debates about welfare, education, health care, and retirement.. In 2004, "human capital" (German: Humankapital) was named the German Un-Word of the Year by a jury of linguistic scholars, who considered the term inappropriate and inhumane, as individuals would be degraded and their abilities classified according to economically relevant quantities. "Human capital" is often confused with human development. The UN suggests "Human development denotes both the process of widening people's choices and improving their well-being". The UN Human Development indices suggest that human capital is merely a means to the end of human development: "Theories of human capital formation and human resource development view human beings as means to increased income and wealth rather than as ends. These theories are concerned with human beings as inputs to increasing production".

See Also


  1. Definition - What does Human Capital Mean? Encyclopedia Britannica
  2. Breaking Down Human Capital Investopedia
  3. Importance of human capital
  4. The Two Kinds of Human Capital MBN
  5. The constituents of human capital Polytechnic
  6. The Significance of Human Capital Theory PoliteknikNSC
  7. Questions On People Management Raised by Human Capital Theory ICPAK
  8. Criticism of the Human Capital Theory Wikipedia

Further Reading