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The Concept of Human Capital

“Human capital is a measure of the economic value added by the workforce/employee's skill set”

The concept of Human capital can be defined as the collective skills, knowledge which an employee acquires on the job, or other intangible assets of individuals that can be used to create economic value for the individuals, their employers, or their community."

Although an organization is a separate legal entity, it ceases to exist if it has no people to maintain an organization’s existence and this is precisely where human capital comes into the fray. In a society which places a strong emphasis on competition, financial return and viability, people issues are sometimes neglected. This is why Human Capital is of utmost importance to reinforce the value of individuals in the company. It is also an indispensable factor in the company. Many ideas, processes, and modules could easily be replaced but not people. People form the fundamental core of any organization. Therefore, human capital is an integral part of any organization and will always continue to be.

Human Capital Definition 

Human capital is defined as the sum total of the economic value delivered by the employee’s skill set of an organization. This measurement is considered or calculated based on the production input of the labors where all the labors are considered equal irrespective of their level. It is a common known fact that the quality of an organization shows the quality of the people, therefore the employees should be considered important to maintain the goodwill of the organization along with a promising future. The leaders, directors, and employees who sum up the human capital of the organization are vital to its success.

What makes up human capital?​

Human capital emphasizes that not all labors are equal and the quality of the workforce can be improved by investing in them. The human capital management (HCM) department which is generally called as the human resources department is responsible to manage the organization’s human capital. The HCM department is responsible for the organization's workforce acquisition, optimization, and management. Additionally, the HCM department is also responsible for workforce recruitment, planning and strategy, development and training, and analytics and reporting.

The term ‘Human Capital’ was first popularized by the economist Theodore Schultz in the year 1960 to define the value of human capacities in organizations. He believed it to be equal to any other capital investment in an organization. This investment could be made through training, education and any other method to enhance the benefit, which ultimately leads to develop and improve the quality of production. It is also inevitable to consider the fact that human capital is a complex theoretical concept that cannot be defined in a uniform manner. 

In simpler words, human capital is the sum total of numerous traits that include knowledge, skills, talents, experience, abilities, training, intelligence, and wisdom possessed collectively and individually by the human strength in any organization.

Why is human capital the most important?

Human capital is considered to be the backbone of the economic development and human development of a nation. The notion that human capital plays an important part to identify income differences have been considered vital by economists. Despite its importance, it was not until the mid-20th century that Gary Becker and a few other renowned economists developed a theory of human capital. According to his theory, an individual’s educational qualification and experience determine his or her labor income. But this was envisaged earlier in the backdrop of microeconomics and later applied to a broader context of macroeconomics. Today, In our contemporary era, which is engulfed with fierce competition, globalization, and technological advancements, the importance of human capital is recognized vital for developed and developing countries akin.

The Importance of human capital value assessment 

The human capital value assessment is an important factor for the future of the organization but is an arduous task as the human capital is an intangible asset. There are no regular standards of measurement to assess human capital as it is unlike the tangible assets such as equipment, accounts receivable and office furniture. The human capital measurement is vital to determine the human capital’s return on investment. Calculating the returns on the human capital investment will help organizations to assess the effectiveness and efficiency of the human capital.

Analyzing the human capital aids to identify what the organization has and what the organization lacks. This will help to identify the gaps and fix what is required for the welfare of the organization. However, it is important to ensure that the process of bridging the gap supports the goal of the company. By dividing the ‘total profit of the organization’ which is the amount received after all the expense and the ‘investment on human capital’ which includes the money invested to develop the human capital, provides the measurement which can be used to determine whether the ROI of an organization is sufficient.           

Numerous economists believe that the real wages in Europe were stagnant for at least 1200 to 1800. The wages of both building craftsmen and agricultural laborers were constant for numerous centuries until the Black Death (1350) which lead to the decrease of human population and as a result of this, the wages rose. However, gradually as the population bounced back, the wages decreased. Apart from all this, a substantial growth identified in real wages and real income per capita is in mid-nineteenth century Europe and a little earlier in North America. The specifically low population growth increased substantially right after the industrial revolution.

Human Capital Theory: Characteristics & Investment

There are numerous characteristics that make human capital specific. Human capital is not liquid, therefore if the investment does not provide positive results there is nothing much to sell. As human capital depends completely on the individuals, the firm will face consequences when the employees quit the job. Even though numerous contemporary growth theories regard human capital as the most critical economic growth factor, numerous theoreticians disregard it. Despite the numerous advantages, there are several disadvantages for this system.

Human capital theory considers that, as education increases productivity in the organization increases. This leads to heterogeneous wages among the employees but does not provide insights about the training and education, which leads to increased wages. According to the statistics, about 30 percent of the difference in wages account to the training and education of individuals, which implies that the human capital theory leaves a big amount of difference in wages unexplained. In the year 2004, the term ‘Human Capital’ was degraded and considered as the ‘German Un-word of the year’ by a jury that consisted of linguistic scholars. The term was considered inhumane and inappropriate as people and their abilities would be degraded and classified with respect to economically relevant quantities.

How is human capital different from human development?

Human capital and human development are often confused to be similar. The UN clarifies this by highlighting that the human development refers to both the process of increasing the choices of people and improving their welfare. But the theories regarding the human capital formation and human resources development identifies the workforce as merely a means to raise and enhance income and wealth. Therefore, the UN states that human capital is simply a means to end human development.

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