Human Capital

Human capital describes the knowledge, abilities, and proficiency of workers in the marketplace. The contribution of human capital to companies' incomes and balance sheets is difficult to define and evaluate. Therefore, the costs and benefits of training and educating employees in order to upgrade their contributions are sometimes hard to justify.

Economists who have studied increase in output estimate that growth in knowledge and skills contributed to production. Theodore W. Schultz, an American economist, coined the term 'human capital‘ in the 1960s. The theory of human capital was developed by his student, Gary S. Becker, who viewed human capital as the outcome of an investment in workers. His theory has become the basis of the determining of wages.

Schultz's theory also postulates that increased education affects one's earnings throughout one's lifetime. Families can influence the cost of human capital acquisition. For example, wealthier families can subsidize the cost of their children's education. By encouraging their children to acquire greater stocks of human capital, which has value on the labor market, parents can create advantages for their children.

General human capital is valued by all potential employers. Formal education produces general human capital. Firm-specific human capital refers to skills and knowledge that are valued by one particular company, and it is produced by on-the-job training. Employers are generally more inclined to provide on-the-job training rather than general skills that employees can carry with them to other employers.

Since 1972, employment in service sectors that depend on knowledge and information has increased dramatically. Employment in real estate, financing, insurance and business services has grown at a faster rate than employment in social and personal services. Manufacturing jobs in developed countries fell in conjunction with the growth of the information sector.

Measuring the capabilities of the changing workforce remains a challenge due to three main barriers. One is the lack of transparency in the cost of labor. It is difficult to access information about the costs to companies when their workers leave the workplace to attend training session. Companies do not measure the loss of productivity while workers practice and perfect the new skills they have learned.

A second barrier to measuring human capital in the technological workplace is the difficulty assessing how much knowledge and skills the workers have acquired through their training. Methods of assessing workers' progress are underdeveloped. Testing workers at the workplace is still uncommon.

The third barrier is the difficulty in translating human capital and the cost of improving human capital onto a balance sheet. Financial reports are not designed to include costs and benefits from upgrading workers' abilities. Workers are not owned by businesses, so they cannot be listed as assets. Furthermore, wages are almost always set according to a job description, and not according to the abilities a worker brings to the workplace.

Another systemic policy that challenges investment in human capital is the tendency of American business managers to be suspicious of government policies that intervene in the workplace. The weak labor movement, together with a belief in business independence, reduces managers' incentive to support social policy that helps workers.

Some managers recognize that investment in human capital increases productivity by improving workers' knowledge or health. Companies with better workers are more competitive in their fields. They are willing to invest in workers to attract the best employees and to keep them happy and well-functioning.

Globalization has contributed to managers' interest in training and helping workers. America's skilled and well-trained workforce gives it a competitive advantage. However, exposure to other countries' attitudes toward workers can give U.S. managers an eye-opening experience. The social programs in Europe and Japan that promote worker performance are far more advanced than those that are available in the U.S.

One proof that human capital has become important to businesses is the proliferation of human resources departments. Human resources recognize human capital as the resource that drives organizational success. HR departments strive for consistent employee engagement. They seek to create a work environment where employees are always enthusiastic about their jobs. Strategic planning improves the chances of employees' skills matching their job assignments. HR leaders also aim to keep employees happy. Reducing employee turnover and improving retention are generally improved by investment in workers. Examples of investments are strengthening employer-employee relationships and offering healthcare and flexible work arrangements.

Selected full-text books and articles on this topic

Stuck in Neutral: Business and the Politics of Human Capital Investment Policy
Cathie Jo Martin.
Princeton University Press, 2000
The Human Firm: A Socio-Economic Analysis of Its Behavior and Potential in a New Economic Age
John F. Tomer.
Routledge, 1999
Wealth Creation and Wealth Sharing: A Colloquium on Corporate Governance and Investments in Human Capital
Margaret M. Blair.
The Brookings Institution, 1996
The Human Side of M & A: How CEOs Leverage the Most Important Asset in Deal Making
Dennis C. Carey; Dayton Ogden.
Oxford University Press, 2004
International Perspectives on the Human Factor in Economic Development
Senyo B-S. K. Adjibolosoo.
Praeger Publishers, 1998
Reinventing Human Resources Management: Challenges and New Directions
Ronald J. Burke; Cary L. Cooper.
Routledge, 2005
Librarian’s tip: "Human Resource Management and Strategic Capability" begin on p. 39
Peace, Prosperity, and Politics
John Mueller.
Westview Press, 2000
Librarian’s tip: Chap. 9 "Human Capital in the Twenty-First Century"
Investing in People: The Human Capital Needs of Rural America
Lionel J. Beaulieu; David Mulkey.
Westview Press, 1995
Strategic Human Capital Management: The Critical Link
Walker, David M.
The Public Manager, Vol. 29, No. 1, Spring 2000
Investments in Human Capital: A Crisis for Financial Managers
Bresnahan, Kenneth M.
The Public Manager, Vol. 29, No. 2, Summer 2000
Survival of the Fittest? Entrepreneurial Human Capital and the Persistence of Underperforming Firms
Gimeno, Javier; Folta, Timothy B.; Cooper, Arnold C.; Woo, Carolyn Y.
Administrative Science Quarterly, Vol. 42, No. 4, December 1997
Peer-reviewed publications on Questia are publications containing articles which were subject to evaluation for accuracy and substance by professional peers of the article's author(s).
Investing in Your Company's Human Capital: Strategies to Avoid Spending Too Little--Or Too Much
Jack J. Phillips.
AMACOM, 2005
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