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. 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.
Alternatively, the term refers to things inserted into human beings to make them more productive.
“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 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.”
This Khan Academy video explains that human capital refers to the investments that companies make into human beings. They make these investments to improve productivity.