What is human capital? Definition and meaning

Human Capital refers to the production factors, coming from human beings, we use to create goods and services. Our knowledge, skills, habits, and social and personality attributes all form part of the human capital that contributes to the creation of goods and services. The adaptability and innovative capacity of individuals play a significant role in a society’s economic resilience and advancement. Our creativity also contributes. Factors of production are the four inputs required for the production of goods and services.

In other words, it is the collection of all our resources. It comprises all our knowledge, abilities, talents, skills, intelligence, training, judgment, and experience. It also includes our wisdom, individually, and collectively.

In a national economy, the term refers to how its population contributes towards wealth creation.

Capital refers to things made by humans that make other things, like machinery and equipment. Human capital may refer to investments made into human beings to improve production, like education, skills, experience, etc.

Human capital, alongside structural capital and relational capital, make up knowledge capital. In today’s economy, which is shifting towards a knowledge economy, the importance of human capital is growing rapidly.

Human Capital
Alternatively, the term refers to things inserted into human beings to make them more productive.

According to Encyclopaedia Britannica:

“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.”

The term contrasts with social capital. Social capital looks at the value of the network of relationships between people, groups, and entities.

Human capital – our value throughout our career

Human capital also refers to the value of a person for a company. Specifically their value regarding being able to produce goods or provide services during the time span of their career.

Putting a monetary value directly on human capital is not possible. However, businesses and economists commonly measure the value of human capital as the current value of an individual’s future wage and salary income.

For example (example quoted from the Financial Times), let’s suppose Mary Smith began her 45-year career with a starting salary of $40,000. We’d expect her salary to increase annually by 3% (average). Therefore, using an 8% rate for the time value of money, her human capital at the beginning of her career would be $705,224.

The human capital value of most college graduates exceeds $1 million.

As we get older, our human value rises. It rises because over time we acquire more knowledge and skills. However, human capital value declines because we are closer to retirement as we get older.

When people retire and give up any future employment, their human value drops to zero.

This type of capital is our single most valuable asset. We should all protect it with disability income insurance and life insurance.

Examples of human capital include a professional football (US: soccer) player’s ability to score goals and a software engineer’s skill in writing computer programs. It also includes an opera singer’s beautiful voice and a doctor’s accuracy and speed in diagnosing ailments in patients.

Two kinds of human capital

There are two kinds of human capital: general and specific.

  • General

This type 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 adaptability of human capital is especially valuable in the digital age, where technological advancements continuously reshape the skills needed in the workforce.

“Human capital” vocabulary

There are many compound nouns containing the words “human capital.” A compound noun is a term that consists of two or more words. “Human capital strategy,” for example, is a compound noun. Let’s have a look at some human-capital-related compound words, their meanings, and how we can use them in a sentence:

  • Human Capital Development

The process of improving the value of a workforce by enhancing their skills, knowledge, and abilities.
Example: “Investments in human capital development have proven to significantly boost productivity and innovation in the tech industry.”

  • Human Capital Management

The set of practices and processes for recruiting, managing, developing, and optimizing the human resources of an organization.
Example: “Effective human capital management is critical for organizations seeking to retain top talent and maintain a competitive edge.”

  • Human Capital Strategy

A forward-looking approach to aligning the workforce’s abilities and career progression with the long-term goals of the organization.
Example: “The company’s human capital strategy focuses on continuous learning opportunities to keep up with the rapidly changing market.”

  • Human Capital Investment

The act of putting resources into the education and training of the workforce to increase their economic value.
Example: “Human capital investment in the form of higher education grants has a high rate of return for society at large.”

  • Human Capital Analytics

The measurement and analysis of data related to human resources to guide decision-making processes.
Example: “Through human capital analytics, the firm was able to identify key drivers of employee performance and satisfaction.”

  • Human Capital Accumulation

The process by which individuals acquire competencies and knowledge that enhance their productivity and potential earnings.
Example: “Countries that promote human capital accumulation often see sustainable growth and development.”

  • Human Capital Formation

The process of increasing the knowledge, skills, and capacities of all the people in a society.
Example: “Human capital formation is an indispensable component of economic development, as it equips the population with the tools necessary for innovation.”

Two Videos

These two interesting video presentations, from our sister YouTube channel – Marketing Business Network, explain what ‘Human Capital’ and ‘Human Resource Development’ are using simple, straightforward, and easy-to-understand language and examples.

  • What is Human Capital?

  • What is Human Resource Development?