Five Elements of Human Capital

  • Skills, Qualifications, and Education
  • Work Experience
  • Social and Communication Skills
  • Habits and Personality Traits
  • Individual Fame and Brand Image

Human capital was a term developed in the 1950s and 1960s by two economists, Jacob Mincer and Gary Becker, who are considered members of a “Chicago School” of economics. The concept, however, goes as far back as Adam Smith, who argued that capital does not just consist of machines and real estate, but also of “the acquired and useful abilities of all the inhabitants or members of the society.” This notion of human abilities and education as constituting a store of capital which can be invested to produce value was originally applied to analysis of nations as a whole but gradually became a key part of the understanding of how businesses succeed in an age where innovation and intellectual property are as important as factories and land for creating value in business. Five of the key elements of this are:

1. Skills, Qualifications, and Education

The productivity of workers is closely tied to their skills, education, and qualifications. Just as factories invest capital in machinery that increases productivity, so workers or companies invest in education and training that increase productivity. This is especially the case in businesses that specialize in services, technology, or intangible products where value is created by innovation and creativity rather than working with physical materials. For example, the key creator of value in a medical practice is the doctors’ training and skills, just as law degrees create value in a legal partnership.

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2. Work Experience

The more experienced employees are, the more they create value. According to the Harvard Business Review, it may take employees anywhere from three months to a year to become productive. Every time a business loses an employee to a competitor, layoffs, or retirement, it needs to invest in recruiting and training new staff, something that is just as much an expense as replacing machinery in a manufacturing plant. Thus, work experience can be seen as a form of capital that generates revenue.

3. Social and Communication Skills

No matter how much employees know or how much they have developed expertise in a corporate culture and practices, that knowledge is of little use if they cannot communicate effectively or work well with other employees. The social and communication skills of employees are even more important in areas of business which involve dealing with customers or clients, as good customer service can affect how customers respond to a brand.

4. Habits and Personality Traits

For individual employees, habits and personality traits can be a source of value. The worker who is disciplined, punctual, meets deadlines, has a positive outlook, and is a team player generates more value than one who may have the same technical skills but lacks these personal traits and habits.

5. Individual Fame and Brand Image

Brand image is what makes a business immediately recognizable to potential customers. Often famous individuals, such as Steve Jobs of Apple, can become iconic figures who generate revenue for a brand. Companies that make sporting goods, fashion companies, and retail businesses often rely on personal branding and celebrity spokespeople to attract customers.

While many companies have access to similar technology, having the best employees and most recognizable brands can increase productivity and profits. Especially now that services rather than tangible products form an increasing percentage of GDP, human capital is increasingly important for individual workers and businesses.