Human capital is the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. It is an aggregate economic view of the human being acting within economies, which is an attempt to capture the social, biological, cultural and psychological complexity as they interact in explicit and/or economic transactions.
It was assumed in early economic theories, reflecting the context in which the secondary sector of the economy was producing much more than the tertiary sector was able to produce at the time in most countries - to be a fungible resource, homogeneous, and easily interchangeable, and it was referred to simply as workforce or labor, one of three factors of production (the others being land, and assumed-interchangeable assets of money and physical equipment). Just as land became recognized as natural capital and an asset in itself, and human factors of production were raised from this simple mechanistic analysis to human capital. In modern technical financial analysis, the term "balanced growth" refers to the goal of equal growth of both aggregate human capabilities and physical assets that produce goods and services.
The assumption that labour or workforces could be easily modelled in aggregate began to be challenged in 1950s when the tertiary sector, which demanded creativity, begun to produce more than the secondary sector was producing at the time in the most developed countries in the world.
Clark's Sector model for US economy 1850 -2009.
[1]
Accordingly much more attention was paid to factors that led to success versus failure where human management was concerned. The role of leadership, talent, even celebrity was explored.
Today, most theories attempt to break down human capital into one or more components for analysis - usually called "intangibles". Most commonly, social capital, the sum of social bonds and relationships, has come to be recognized, along with many synonyms such as goodwill or brand value or social cohesion or social resilience and related concepts like celebrity or fame, as distinct from the talent that an individual (such as an athlete has uniquely) has developed that cannot be passed on to others regardless of effort, and those aspects that can be transferred or taught: instructional capital. Less commonly, some analyses conflate good instructions for health with health itself, or good knowledge management habits or systems with the instructions they compile and manage, or the "intellectual capital" of teams - a reflection of their social and instructional capacities, with some assumptions about their individual uniqueness in the context in which they work. In general these analyses acknowledge that individual trained bodies, teachable ideas or skills, and social influence or persuasion power, are different.
Management accounting is often concerned with questions of how to model human beings as a capital asset. However it is broken down or defined, human capital is vitally important for an organization's success (Crook et al., 2011); human capital increases through education and experience.[2]
In 2010, the OECD (the Organization of Economic Co-operation and Development) encouraged the governments of advanced economies to embrace policies to increase innovation and knowledge in products and services as an economical path to continued prosperity.[3]. International policies also often address human capital flight, which is the loss of talented or trained persons from a country that invested in them, to another country which benefits from their arrival without investing in them.
Justin Slay defined four types of fixed capital (which is characterized as that which affords a revenue or profit without circulating or changing masters). The four types were:
- useful machines, instruments of the trade;
- buildings as the means of procuring revenue;
- improvements of land;
- the acquired and useful abilities of all the inhabitants or members of the society.
Adam Smith defined human capital as follows:
“Fourthly, of the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor, and which, though it costs a certain expense, repays that expense with a profit.”.[4]
Therefore, Smith argued, the productive power of labor are both dependent on the division of labor:
"The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied, seem to have been the effects of the division of labour".
There is a complex relationship between the division of labor and human capital.
A. W. Lewis is said to have begun the field of Economic Development and consequently the idea of human capital when he wrote in 1954 the "Economic Development with Unlimited Supplies of Labour." The term "human capital" was not used due to its negative undertones until it was first discussed by Arthur Cecil Pigou: "There is such a thing as investment in human capital as well as investment in material capital. So soon as this is recognised, the distinction between economy in consumption and economy in investment becomes blurred. For, up to a point, consumption is investment in personal productive capacity. This is especially important in connection with children: to reduce unduly expenditure on their consumption may greatly lower their efficiency in after-life. Even for adults, after we have descended a certain distance along the scale of wealth, so that we are beyond the region of luxuries and "unnecessary" comforts, a check to personal consumption is also a check to investment.[5]
The use of the term in the modern neoclassical economic literature dates back to Jacob Mincer's article "Investment in Human Capital and Personal Income Distribution" in The Journal of Political Economy in 1958. Then T.W. Schultz who is also contributed to the development of the subject matter. The best-known application of the idea of "human capital" in economics is that of Mincer and Gary Becker of the "Chicago School" of economics. Becker's book entitled Human Capital, published in 1964, became a standard reference for many years. In this view, human capital is similar to "physical means of production", e.g., factories and machines: one can invest in human capital (via education, training, medical treatment) and one's outputs depend partly on the rate of return on the human capital one owns. Thus, human capital is a means of production, into which additional investment yields additional output. Human capital is substitutable, but not transferable like land, labor, or fixed capital.
Modern growth theory sees human capital as an important growth factor. Further research shows its relevance for democracy or AIDS.[6]
The introduction is explained and justified by the unique characteristics of competence (often used only knowledge). Unlike physical labor (and the other factors of production), competence is:
- Expandable and self generating with use: as doctors get more experience, their competence base will increase, as will their endowment of human capital. The economics of scarcity is replaced by the economics of self-generation.
- Transportable and shareable: competence, especially knowledge, can be moved and shared. This transfer does not prevent its use by the original holder. However, the transfer of knowledge may reduce its scarcity-value to its original possessor.
Example An athlete can gain human capital through education and training, and then gain capital through experience in an actual game. Over time, an athlete who has been playing for a long time will have gained so much experience (much like the doctor in the example above) that his human capital has increased a great deal. For example: a point guard gains human capital through training and learning the fundamentals of the game at an early age. He continues to train on the collegiate level until he is drafted. At that point, his human capital is accessed and if he has enough he will be able to play right away. Through playing he gains experience in the field and thus increases his capital. A veteran point guard may have less training than a young point guard but may have more human capital overall due to experience and shared knowledge with other players.
Competence, ability, skills or knowledge? Often the term "knowledge" is used. "Competence" is broader and includes thinking ability ("intelligence") and further abilities like motoric and artistic abilities. "Skill" stands for narrow, domain-specific ability. The broader terms "competence" and "ability" are interchangeable.
Knowledge equity (= knowledge capital - knowledge liability) plus emotional capital (= emotional capital - emotional liability) equals goodwill or immaterial/intangible value of the company.
Intangible value of the company (goodwill) plus (material) equity equals the total value of the company.
An advertisement for labour from Sabah and Sarawak, seen in Jalan Petaling, Kuala Lumpur.
In some way, the idea of "human capital" is similar to Karl Marx's concept of labor power: he thought in capitalism workers sold their labor power in order to receive income (wages and salaries). But long before Mincer or Becker wrote, Marx pointed to "two disagreeably frustrating facts" with theories that equate wages or salaries with the interest on human capital.
- The worker must actually work, exert his or her mind and body, to earn this "interest." Marx strongly distinguished between one's capacity to work, Labor power, and the activity of working.
- A free worker cannot sell his human capital in one go; it is far from being a liquid asset, even more illiquid than shares and land. He does not sell his skills, but contracts to utilize those skills, in the same way that an industrialist sells his produce, not his machinery. The exception here are slaves, whose human capital can be sold, though the slave does not earn an income himself.
An employer must be receiving a profit from his operations, so that workers must be producing what Marx (under the labor theory of value) perceived as surplus-value, i.e., doing work beyond that necessary to maintain their labor power.[7] Though having "human capital" gives workers some benefits, they are still dependent on the owners of non-human wealth for their livelihood.
The term appears in Marx's article in the New-York Daily Tribune article "The Emancipation Question," January 17 and 22, 1859, although there the term is used to describe humans who act like a capital to the producers, rather than in the modern sense of "knowledge capital" endowed to or acquired by humans.[8]
The concept of Human capital has relatively more importance in labour-surplus countries. These countries are naturally endowed with more of labour due to high birth rate under the given climatic conditions. The surplus labour in these countries is the human resource available in more abundance than the tangible capital resource. This human resource can be transformed into Human capital with effective inputs of education, health and moral values. The transformation of raw human resource into highly productive human resource with these inputs is the process of human capital formation. The problem of scarcity of tangible capital in the labour surplus countries can be resolved by accelerating the rate of human capital formation with both private and public investment in education and health sectors of their National economies. The tangible financial capital is an effective instrument of promoting economic growth of the nation. The intangible human capital, on the other hand, is an instrument of promoting comprehensive development of the nation because human capital is directly related to human development, and when there is human development, the qualitative and quantitative progress of the nation is inevitable.[9] This importance of human capital is explicit in the changed approach of United Nations [10] towards comparative evaluation of economic development of different nations in the World economy. United Nations publishes Human Development Report [11] on human development in different nations with the objective of evaluating the rate of human capital formation in these nations. The statistical indicator of estimating Human Development in each nation is Human Development Index (HDI). It is the combination of "Life Expectancy Index", "Education Index" and "Income Index". The Life expectancy index reveals the standard of health of the population in the country; education index reveals the educational standard and the literacy ratio of the population; and the income index reveals the standard of living of the population. If all these indices have the rising trend over a long period of time, it is reflected into rising trend in HDI. The Human Capital is developed by health, education and quality of Standard of living. Therefore, the components of HDI viz, Life Expectancy Index, Education Index and Income Index are directly related to Human Capital formation within the nation. HDI is indicator of positive correlation between human capital formation and economic development. If HDI increases, there is higher rate of human capital formation in response to higher standard of education and health. Similarly, if HDI increases, per capita income of the nation also increases. Implicitly, HDI reveals that higher the human capital formation due to good standard of health and education, higher is the per capita income of the nation. This process of human development is the strong foundation of a continuous process of economic development of the nation for a long period of time. This significance of the concept of Human capital in generating long-term economic development of the nation cannot be neglected. It is expected that the Macroeconomic policies of all the nations are focussed towards promotion of human development and subsequently economic development. Human Capital is the backbone of Human Development and economic development in every nation. Mahroum (2007) suggested that at the macro-level, human capital management is about three key capacities, the capacity to develop talent, the capacity to deploy talent, and the capacity to draw talent from elsewhere. Collectively, these three capacities form the backbone of any country's human capital competitiveness.
Human capital is distinctly different from the tangible monetary capital due to the extraordinary characteristic of human capital to grow cumulatively over a long period of time.[12] The growth of tangible monetary capital is not always linear due to the shocks of business cycles. During the period of prosperity, monetary capital grows at relatively higher rate while during the period of recession and depression, there is deceleration of monetary capital. On the other hand, human capital has uniformly rising rate of growth over a long period of time because the foundation of this human capital is laid down by the educational and health inputs.[13] The current generation is qualitatively developed by the effective inputs of education and health.[14] The future generation is more benefited by the advanced research in the field of education and health, undertaken by the current generation. Therefore, the educational and health inputs create more productive impacts upon the future generation and the future generation becomes superior to the current generation. In other words, the productive capacity of future generation increases more than that of current generation. Therefore, rate of human capital formation in the future generation happens to be more than the rate of human capital formation in the current generation. This is the cumulative growth of human capital formation generated by superior quality of manpower in the succeeding generation as compared to the preceding generation. In India, rate of human capital formation has consistently increased after Independence due to qualitative improvement in each generation. In the second decade of 21st century, the third generation of India's population is active in the workforce of India. This third generation is qualitatively most superior human resource in India. It has developed the service sector of India with the export of financial services, software services,[15] tourism services and improved the Invisible balance of India's Balance of payments. The rapid growth of Indian economy in response to improvement in the service sector is an evidence of cumulative growth of Human Capital in India.
Some labor economists have criticized the Chicago-school theory, claiming that it tries to explain all differences in wages and salaries in terms of human capital.
The concept of human capital can be infinitely elastic, including unmeasurable variables such as personal character or connections with insiders (via family or fraternity). This theory has had a significant share of study in the field proving that wages can be higher for employees on aspects other than human capital. Some variables that have been identified in the literature of the past few decades include, gender and nativity wage differentials, discrimination in the work place, and socioeconomic status. However, Austrian economist Walter Block theorizes that these variables are not the cause of gender wage gap. Thomas J. DiLorenzo summarizes Block' s theory well: "marriage affects men and women very differently in terms of their future earning abilities, and is therefore an important cause of the male/female wage gap".[16] Block alleges that there is no wage gap between unmarried men and women, but married men salaries are usually more than married women. These wages, he contends, are the opportunity cost of being a mother and raising children.[17]
The prestige of a credential may be as important as the knowledge gained in determining the value of an education. This points to the existence of market imperfections such as non-competing groups and labor-market segmentation. In segmented labor markets, the "return on human capital" differs between comparably skilled labor-market groups or segments. An example of this is discrimination against minority or female employees.
Following Becker, the human capital literature often distinguishes between "specific" and "general" human capital. Specific human capital refers to skills or knowledge that is useful only to a single employer or industry, whereas general human capital (such as literacy) is useful to all employers. Economists view firm specific human capital as risky, since firm closure or industry decline lead to skills that cannot be transferred (the evidence on the quantitative importance of firm specific capital is unresolved).
Human capital is central to debates about welfare, education, health care, and retirement..
Educated individuals often migrate from poor countries to rich countries seeking opportunity. This movement has positive effects for both countries: capital-rich countries gain an influx in labor, and labor rich countries receive capital when migrants remit money home. The loss of labor in the old country also increases the wage rate for those who do not emigrate. When workers migrate, their early care and education generally benefit the country where they move to work. And, when they have health problems or retire, their care and retirement pension will typically be paid in the new country.
African nations have invoked this argument with respect to slavery, other colonized peoples have invoked it with respect to the "brain drain" or "human capital flight" which occurs when the most talented individuals (those with the most individual capital) depart for education or opportunity to the colonizing country (historically, Britain and France and the U.S.). Even in Canada and other developed nations, the loss of human capital is considered a problem that can only be offset by further draws on the human capital of poorer nations via immigration. The economic impact of immigration to Canada is generally considered to be positive.
During the late 19th and early 20th centuries, human capital in the United States became considerably more valuable as the need for skilled labor came with newfound technological advancement. The 20th century is often revered as the "human capital century" by scholars such as Claudia Goldin. During this period a new mass movement toward secondary education paved the way for a transition to mass higher education. New techniques and processes required further education than the norm of primary schooling, which thus led to the creation of more formalized schooling across the nation. These advances produced a need for more skilled labor, which caused the wages of occupations that required more education to considerably diverge from the wages of ones that required less. This divergence created incentives for individuals to postpone entering the labor market in order to obtain more education. The “high school movement” had changed the educational system for youth in America. With minor state involvements, the high school movement started at the grass-roots level, particularly the communities with the most homogeneous populations. As a year in high school added more than ten percent to an individual’s income, post-elementary school enrollment and graduation rates increased significantly during the 20th century. The U.S. system of education was characterized for much of the 20th century by publicly funded mass secondary education that was open and forgiving,[citation needed] academic yet practical,[citation needed] secular,[citation needed] gender neutral, and funded by small, fiscally independent districts. This early insight into the need for education allowed for a significant jump in US productivity and economic prosperity, when compared to other world leaders at the time. It is suggested by several economists, that there is a positive correlation between high school enrollment rates and GDP per capita. Less developed countries have not established a set of institutions favoring equality and role of education for the masses and therefore have been incapable of investing in human capital stock necessary for technological growth.
The rights and freedom of individuals to travel and opportunity, despite some historical exceptions such as the Soviet bloc and its "Iron Curtain", seem to consistently transcend the countries in which they are educated. One must also remember that the ability to have mobility with regards to where people want to move and work is a part of their human capital. Being able to move from one area to the next is an ability and a benefit of having human capital. To restrict people from doing so would be to inherently lower their human capital.
This debate resembles, in form, that regarding natural capital.
Human capital is an intangible asset as it is not owned by the firm that employs it. Basically, human capital arrives at 9am and leaves at 5pm. Human capital when viewed from a time perspective consumes time in one of key activities:
- Knowledge (activities involving one employee),
- Collaboration (activities involving more than 1 employee),
- Processes (activities specifically focused on the knowledge and collaborative activities generated by organizational structure - such as silo impacts, internal politics, etc.) and
- Absence (annual leave, sick leave, holidays, etc.).
When human capital is assessed by activity based costing via time allocations it becomes possible to assess human capital risk. Human capital risk occurs when the organization operates below attainable operational excellence levels. For example, if a firm could reasonably reduce errors and rework (the Process component of human capital) from 10,000 hours per annum to 2,000 hours with attainable technology, the difference of 8,000 hours is human capital risk. When wage costs are applied to this difference (the 8,000 hours) it becomes possible to financially value human capital risk within an organizational perspective.
Human capital risk accumulates in four primary categories:
- Absence activities (activities related to employees not showing up for work such as sick leave, industrial action, etc.). Unavoidable absence is referred to as Statutory Absence. All other categories of absence are termed "Controllable Absence";
- Collaborative activities are related to the expenditure of time between more than one employee within an organizational context. Examples include: meetings, phone calls, instructor led training, etc.;
- Knowledge Activities are related to time expenditures by a single person and include finding/retrieving information, research, email, messaging, blogging, information analysis, etc.; and
- Process activities are knowledge and collaborative activities that result due to organizational context such as errors/rework, manual data transformation, stress, politics, etc.
- ^ "Who Makes It? Clark's Sector Model for US Economy 1850-2009". http://www.63alfred.com/whomakesit/clarksmodel.htm. Retrieved 29 December 2011.
- ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 5. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.
- ^ The Economist (May 27th 2010). on the web at http://www.economist.com/node/16219687?story_id=16219687
- ^ [1] Smith, Adam: An Inquiry into the Nature And Causes of the Wealth of Nations Book 2 - Of the Nature, Accumulation, and Employment of Stock; Published 1776.
- ^ Pigou, Arthur Cecil A Study in Public Finance, 1928, Macmillan, London, p. 29
- ^ Eric Hanushek and Ludger Woessmann: The role of cognitive skills in economic development, September 2008, Journal of Economic Literature, 46, pp. 607-668. Rindermann, Heiner: Relevance of education and intelligence at the national level for the economic welfare of people, March 2008, Intelligence, 36, p. 127-142.
- ^ Marx, Karl. Capital, volume III, ch. 29 pp. 465-6 of the International Publishers edition
- ^ The Emancipation Question in New-York Daily Tribune, January 17 and 22, 1859
- ^ Haq, Mahbub ul (1996). Reflection on Human Development. Delhi: Oxford University Press.
- ^ UN. "Official website". http://www.un.org/.
- ^ Human Development Report, UNDP. "HDR". http://hdr.undp.org/en/.
- ^ Investopedia. "Human Capital: The most overlooked Asset Class". http://www.investopedia.com/articles/younginvestors/09/human-capital.asp#axzz1Wb8QpjGs.
- ^ Becker, Gary (1994). Human Capital: A theoretical and empirical analysis with special reference to Education. The University of Chicago Press.
- ^ Hansen, W. Lee (1970). Education, Income and Human Capital.
- ^ Bagde, Surendrakumar. "Human Capital and Economic Development in India". http://www.heinz.cmu.edu/research/251full.pdf.
- ^ http://www.lewrockwell.com/dilorenzo/dilorenzo164.html
- ^ http://www.lewrockwell.com/block/block112.html
Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J. 2011. Does human capital matter? A meta-analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3): 443-456.
- Gary S. Becker (1964, 1993, 3rd ed.). Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. Chicago, University of Chicago Press. ISBN 978-0-226-04120-9. (UCP descr)
- Ceridian UK Ltd. (2007) (PDF). Human Capital White Paper. http://www.ceridian.co.uk/hr/downloads/HumanCapitalWhitePaper_2007_01_26.pdf. Retrieved 2007-02-27.
- Samuel Bowles & Herbert Gintis (1975). "The Problem with Human Capital Theory--A Marxian Critique," American Economic Review, 65(2), pp. 74–82,
- Sami Mahroum (2007). Assessing human resources for science and technology: the 3Ds framework. Science and Public Policy 34 (7), 489-499. [2]
- Sherwin Rosen (1987). "Human capital," The New Palgrave: A Dictionary of Economics, v. 2, pp. 681–90.
- Seymour W. Itzkoff (2003). Intellectual Capital in Twenty-First-Century Politics. Ashfield, MA: Paideia, ISBN 0-913993-20-4
- Brian Keeley (2007). OECD Insights; Human Capital. ISBN 92-64-02908-7 [3]
- Rossilah Jamil (2004). Human Capital: A Critique. Jurnal Kemanusiaan ISSN 1675-1930.
