Human Capital – Definition

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Human Capital Definition

Human capital refers to the value of human, skills, knowledge and experience that a company has. Human capital is an intangible asset that comprises of workers education, training, expertise, intelligence, loyalty and knowledge that the population that makes up a company’s workforce has. Human capital is not recorded on a company’s balance sheet, it is otherwise called economic value made available to a company by its workforce.

Human capital is important to all businesses as it determines the productivity of a business. Companies invest in human capital by providing quality training, education and experience that will increase the economic value of its workers.

A Little More on What is Human Capital

Human capital alongside other factors is crucial to the productivity of a business. An increased productivity births profitability. Generally, a company is viewed in line with the category of individuals that make up its workforce. As the general saying, an organization is as good as its people.

The human capital of a company are its employees, executives and directors that contribute significantly to the growth and success of the organization. Every company has a Human Resource (HR) department, which is in charge of how its human capital are effectively managed.

Migration of human capital is common in global economies, this is where employees change jobs for better and global job opportunities. Usually, there is migration of skilled employees from rural areas to urban regions.

Calculating Human Capital

How well a company invests in its people or workforce determines the strength of its human capital. Through the investment of a company in the education, training and skills of workers, human capital can be calculated. Also, the investment of a company over its people reflects  the overall productivity and profitability of the company, this will create an avenue for the calculation of human capital. Human resource managers are the professionals that calculate human capital. To calculate the human capital of a firm, the overall profits of a company will be divided by its investment in human capital.

Here are some important things to know about human capital:

  • Human capital refers to the intangible asset of a company which comprises of the skills, knowledge, experience and economic value of its workforce (employees, executives and directors).
  • A company can invest in its human capital through training and education of employees.
  • The human capital of a company influences its productivity and profitability.
  • Failure to grow with new innovations, trends and technology might make human capital depreciate.
  • The human resource department of a company manages its human capital.
  • For a company to calculate its human capital, the amount of investment a company pumps into its human capital is important.

Human Capital and Economic Growth

There is a connection between the economic growth, productivity, profitably and the human capital of an organization. Most essentially, when considering the economic growth of a firm, it’s human capital is important. Given the fact that workers or employees of a company comes with distinct skills, expertise, knowledge and experience that contribute to the development of a company. The relationship between human capital and economic growth can be examined by checking how well a company invests in the development of its people. The relationship between human capital and economic growth is also important to governments of countries.

Does Human Capital Depreciate?

Oftentimes, people ask whether human capital can depreciate. Yes, human capital does depreciates. Take for instance, if individuals with skills experience long periods of unemployment and they are unable to advance with technology and innovation, depreciation of human capital can occur.

Human capital depreciation can be measured through the inability of workers to stay in the workforce of a company or when there is a decline in skills and mental capacity of the workers. Inability of workers to keep up with the level of specialization in a company or meet its operational demands is another factor for human capital depreciation.

History of Human Capital

Adam Smith, an economist was the first to refer to the concept of human capital in the 18th century. In his book titled ” An Inquiry into the Nature and Causes of the Wealth of Nations,” Adam Smith explicitly discussed the roles of talents, knowledge, skills and expertise that individuals possess to the success of a firm or nation. According to Smith, when firms invest in its human capital, it enhances productivity and profitability.

Furthermore, the term was invented in the 1960s by Gary Becker and Theodore Schultz to describe the labor a company requires to manufacture its goods. According to these economists, human capital plays a major role in  economic growth, productivity and profitability of an economy.

Criticism of Human Capital Theories

There are certain criticisms by academicians and scholars against human capital. The enrollment of bourgeois individualism by human capital is one of the drawbacks of this concept that scholars criticized. According to critics, the middle class people exploit the working class, this is seen as exploitative and inhumane. Also, most workers in the human capital theory become capitalists and contribute to the unequal distribution of wealth in the economy. Oftentimes, skilled individuals in the workforce and those who have higher education have larger salaries than others, this means they will have more spending power than other individuals in the society.

References for “Human Capital › Insights › Markets & Economy › Economics help blog › economics › Investing › US Economy

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