Human capital is a relatively new term in economics. Its base concept, however, has been around for much longer. This term originated in the 1950s. It became more solidly defined in the 1960s by economists Gary Becker and Theodore Schultz. It advocates the necessity of companies investing in their human workforce to gain more skilled and valuable employees. It is a central concept in modern economic policy.
The Definition
Human capital is the value of a person’s skillset in terms of economic value to a company and the general economy. It can also refer to collective capital produced by a group of people or even an entire society. Elements of an employee’s capital include traits such as:
- creativity
- knowledge
- hard skills
- connections
The Economist adds that because companies invest in physical capital, such as a new production line, the same holds true for their human employees. It is an idea opposed to the concept that all labor is equal and sees little value in lumping skilled and unskilled workers together.
How It Is Measured
By its very nature, this concept is not easy to place a monetary value on. However, it should be obvious to most employers that the more they invest in a worker’s education and skillset, the more valuable that employee will be to the company. It puts a strong incentive on companies to increase the value of their employees to grow their business and bring in more revenue. Most importantly, this theory strongly advocates that an individual’s capital can improve as they obtain new:
- skills
- knowledge
- experience
The idea gives employers tools to analyze both potential and current employees in greater detail and their use to the company. This helps employers:
- make hiring decisions
- choose whom to promote
- decide how much individual salaries should be
- choose whom to let go
Criticism of the Idea and Its Usage
This concept has received some criticism for oversimplifying differences in salaries. There are alternative causes for differences between employees, such as:
- discrimination
- disabilities
- socioeconomic status
It also includes variables that are simply unmeasurable, such as strength of character and goodwill. This potentially decreases its usefulness to employers. It may be dangerous for employers to rely on their employees’ capital for the simple reason that the investment belongs to the employee, not the employer. This makes it so an employer will lose their investment when an employee leaves the company.
Importance
This economic concept is important because it is at the core of debates on many modern issues such as:
- education
- welfare
- healthcare and more
It is often discussed how to determine which people are worth investing in. Some argue that it is solely the responsibility of the individual to invest in their own growth to stay valuable in the workforce. However, this concept can help employers analyze their workforce more carefully to make smarter hiring and training decisions. Considering employee capital can also help a company offer more attractive benefits for their employees, such as paying for continuing education.
Concluding Thoughts
This term is an important economic concept for employers to understand. It helps employers develop a clearer picture of their workforce as a profitable investment. Human capital is a relatively simple but encompassing concept that will continue to remain relevant in modern discussions of capitalism.
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