Human Capital – Definition and Factors

What is Human Capital?

Human capital as a measure of characteristics, the capacity, education, and skills of employees, that directly or indirectly influences their abilities, productivity levels, efficiency and skills. In short, human capital is the skills possessed by the labour force.

Human capital is intangible in nature as you cannot judge human capital like you would judge number of people. Hence it is never mentioned on a balance sheet even though it human capital is important to an organization.

Besides being regarded as an asset or resource, human capital is composed of the notion of investments in people, to enhance the productivity of an individual. For example, training, health, and education are the most vital investments in people, as they improve the performance and productivity of individuals.

The three are considered essential since no individual can be separated with his or her values, skills, health or knowledge, like physical and financial assets can be separated.

Factors that influence Human Capital in an organization

• Geographical location – The attitude and expectations of labor get affected by the environment in which they work.
• Creativity – It is directly affected by the innovation of the labor. For example in the technology industry, a company that has innovative labor faces low competition in the market.
• Education levels – the productivity levels of a country or organization are to an extent affected by the quality and level of education of the labor.
• Skills – The productivity of any organization or business is greatly determined by the skills of the labor. For example, in Apple company skills are vital in the production of quality products.
• Social skills – In any business, social skills play a greater role in determining if the products and services are purchased. For example, communication is essential in production, as well as in making negotiations.
• Personality – The personality of the employees controls the human capital of any organization or nation. For example, self-driven and hardworking labor increases the productivity, while lazy and personality with bad habits lowers the productivity.

Can human capital be measured?

Human capital can be measured for statistical reasons. However, the measure is limited as it takes into account only a section of the totality.  For example, the human capital of UK can only be measured in monetary terms and represented as possible earnings of a population age that is working.

Human capital can either be reported as either increasing or decreasing.  A decrease in human capital shows an increase in unemployment and a decrease in wages, while an increase is an indication of a decrease in unemployment and an increase in wages.

Therefore, it is important to note that in both cases, the measurement is based on the earning potential, which does not indicate all other human aspects.  From the above, it is true to conclude that human capital can be measured in different ways, depending on the factors considered.

Additionally, it is also true to say that it is easier to measure human capital in primary and secondary sectors.  For example, you can measure human capital of workers in manufacturing and agriculture, based on their productivity. In such sectors, it is measured based on quantity produced and physical strength used.

On the other hand, measuring human capital in service or tertiary sector is extremely difficult, as the jobs vary, and they all depend on the skills and qualities to determine the output.   For example, you cannot measure the human capital of a teacher by the level of study, because despite being the best academician, he or she might lack some basic teaching skills like command of a class and inspiration.

Is it possible to increase human capital or skills?

Yes, increasing it is possible, and can be achieved through various ways which include:

• Vocational training – an organization needs to provide direct vocational training for skills related to the job of its employees, in order to increase human capital. However, based on the skill the training should be specific. For example, electricians should receive training related to their field.
• Division of labor and specialization – through specialization, workers focus on specific jobs and their specialization of skills increases. However, in some cases, specialization might make the job boring or repetitive, leading to the minimal development of skills by the workers.  Nevertheless, the division of labor is the greatest way of improving such capital.
• Improved infrastructure – The human capital of an economy gets influenced by the infrastructure. To increase the human capital of any economy, the infrastructure must be improved.  For example, improving means of transport and communication.
• Competition – There is greater potential for increasing human capital in in an economy that supports the creation of business and self-employment, than in an economy that hinders entrepreneurs and creativity due to state monopolies.

Divergent views on human capital

Human capital is seen as a set of skills, which improves the productivity of workers.  Although this is effective for practical reasons, there are other views on the same. These views include:

• Spence view states that the measures that are observable are and mostly an indicator of their ability, not characteristics, and it very essential in the production process.
• Bowles-Gintis view: the view states that the ability to work in an organization by following orders is human capital. As per the view, the role of the school is installing individuals with the right ideology of approaching life.
• Schultz/ Nelson –Phelps view: according to the view human capital is the ability of workers to adapt to situations in a changing environment.
• Gardener view: as per the view, human capital should be viewed in one-dimension, because the type of skills and dimensions are in multiples.
• Becker view: the view states that production process is directly dependent on human capital.  To be precise, the productivity of workers in all tasks get increased by human capital, although in different ways, and in different situations, organizations, and tasks.  Generally, human capital has a complex task in the production process, but clearly indicated by a one-dimensional object. For example, a stock of skills or knowledge, and it is a portion of the production process.

Significance of human capital

• The growth of the economy and productivity: Economic growth of any nation depends heavily on enhanced human capital. For an economy to grow and the labor productivity to increase, the workforce must be creative, innovative and well educated.
• Increased migration: Due to globalization, there is increased movement across borders, thus skilled workers are moving from countries with low income, to work in countries with higher income. For example, most skilled workers from different countries in the world are moving to the US, because of its high income. Nevertheless, this movement might cause negative effects to developing countries, because the best workforce does not develop their economy.
• Structural unemployment: getting employment is extremely difficult to individuals with human capital that does not suit the requirements of modern employers. Besides, modern economies have resulted to de-industrialization, hence manual workers are forced to survive in labor market that is different from what they are used to.  For example, organizations are currently hiring workers who are well educated and equipped with technological skills; hence uneducated workers are losing jobs or trying other manual jobs for survival.
• Quality of employment: human capital has resulted to the greater divergence between temporary jobs that are paid lowly and skilled jobs in modern economies. As a result, only creative and high-skilled workers have higher opportunities of landing employment contracts that are good or establishing self-employment.