Understanding Human Capital and Its Importance

If you work in human resources or have studied economics, then you have probably heard the term “human capital.” But what does this really mean? What is the importance of human capital, and how does it affect your company’s success? Let’s take a deep look at understanding this economic term.

What is Human Capital?

Human capital is the economic value of a worker’s intangible assets or qualities that can’t be found on a company’s balance sheet. These assets include the worker’s attributes, communication, creativity, education, emotions, experience, habits, health, intelligence, judgment, knowledge, personality, qualifications, skills, talents, training and values, such as loyalty and punctuality.

All of these assets create a type of wealth that is valuable to the company and its goals. In other words, the assets can have an economic value for the employer, as they can influence the company’s productivity, profitability and earning potential; the employee uses these assets to produce a good or service for the company.

Think of it this way – it is better to have an employee with skills and knowledge that can boost the company’s goals than to have an employee with no skills or knowledge.

Keep in mind that human capital can rise as an employee gets older since that employee has gained more knowledge and experience. At the same time, it can depreciate after a long period of unemployment or even retirement, as the employee has lost the ability to keep up with modern technology and innovation. It’s like a car – if it isn’t used for a long time, parts start to break down and become outdated.

Two Types

There are two types: general and specific.

General human capital is when the employee has knowledge and skills that different types of employers value. For example, an employer will always value an employee who can type or use search engines with ease.

Specific human capital, on the other hand, is when the employee has knowledge and skills that only one or two employers will value. For example, an aspiring mechanic will have certain skills that an auto body shop will value but not at a dentist’s office.

Quick History Lesson

The idea of human capital actually goes back to the 18^th century with economist Adam Smith, who referred to it in his book “An Inquiry into the Nature and Causes of the Wealth of Nations.” He suggested that improving it through training and education can lead to a more profitable enterprise, which can add to society’s overall wealth.

Philosopher Karl Marx also talked about human capital, though he called it “labor power” and suggested that in capitalist systems, people sell their labor power in return for income.

Nobel Prize winners and economists Gary Becker and Theodore Schultz then used the term to reflect the value of human capacities. They claimed that investing in workers is the same as investing in capital equipment with the hopes of yielding a higher income and improving the quality and level of production. To them, investing in an employee’s education was a good way to benefit the company and the overall economy.

Why is Human Capital Important?

Every employee is different, so every individual human capital worth will be different. However, employers can strive for similar or even improved human capital in the employees by investing in the employees’ education, experience and work benefits, especially if these investments make the employees feel like they are more important and involved in the company. This, in turn, can make the employees want to put in more effort, commitment and motivation towards the company, which leads to a higher-quality workforce.

These investments can include investing in the employee’s higher education, such as funding college scholarships; providing work training and development, as well as motivational support; enhancing the employee’s skill development; empowering the employees and encouraging participating; creating more flexible jobs; supplying bonuses and benefits; and more. The more investments made, especially over a continuous, long-term timeline, the better off the human capital will be.

Since human capital is connected to economic value for the employers, a higher value can theoretically increase the productivity and profitability of the company. Therefore, the more a company invests in an employee, the better off the company can be, too. Again, a company would prefer an employee with skills and knowledge over someone with no skills and knowledge.

Investing in an employee can also help the overall economy. For example, if an employer invests in an employee’s higher education, this means the employee can get a higher degree. Higher degrees often yield a larger salary, which now means they have more money to spend on the economy.

Who Oversees Human Capital?

The human resources (HR) department usually oversees human capital. This makes sense as the HR department often manages employee training and development, management, optimization, recruitment, retention and workforce acquisition and planning. HR managers can calculate the return on investment (ROI) by dividing the company’s total profits by the investment made.

However, the company’s top employees, such as directors and CEOs, should be involved in ensuring that human capital is critical to the business’s overall success. If the CEO knows a certain employee with specific skills can bring something extra to the table, the CEO should get more involved in that employee’s connection to the company.

Human capital can also be maintained by individual employees. If every employee maintains the necessary knowledge and skills so the human capital pool is consistent and up-to-date, the company will thrive.

By having all three branches working together, the company can achieve a positive performance rate by tapping into the human capital pool and influencing it towards the company’s goals.