Human Capital: Definition, Risk, Examples, Theory & History

Human capital is crucial to a company because it is sometimes claimed that an organization is only as good as its employees, starting at the top.

It is often administered by a corporation’s human resources (HR) division, which is also in charge of hiring, managing, and maximizing the staff.

Planning and strategy for the workforce, hiring, training, and developing employees, and reporting and analytics are some of its further mandates.

Talents are referred to as human capital.

Employers respect traits like loyalty, timeliness, and assets like education, training, Intelligence, talents, and physical and mental health.

Since it cannot be listed on a company’s balance sheet, it is an intangible asset or quality. It is believed that investing in human capital will boost profitability and productivity.

The likelihood of a company’s productivity and success increases with the investment it makes in its people.

What Is Human Capital?

Economic expansion and human capital have a close relationship.

By enhancing people’s knowledge and abilities, human capital impacts economic growth and can contribute to the development of an economy.

Employees’ knowledge, skill sets, and experience in an economy are referred to as human capital.

Since a competent workforce can result in higher productivity, the skills have economic worth. Realizing that not everyone has the same set of abilities or knowledge is what the concept of human capital is all about
Investing in people’s education is another way to raise the standard of employment.

The idea behind Human capital

The idea of human capital acknowledges that not all work is created equal. Employers can, however, raise the quality of that capital by spending money on their workforce.

The workforce’s knowledge, skills, and experience can help with this. All of this has significant economic worth for both employers and the economy at large.

These investments in human capital may be easily calculated because they are based on the investment of employee skills and knowledge through education.

The overall profitability, both before and after any investments, can be calculated by HR managers.

The business’s total profits are divided by the total amount invested in human capital to arrive at any return on investment.

Depreciation due to Human capital

If individuals cannot or will not accept new technologies or procedures, their human capital may decline.

On the other hand, someone who adopts them will benefit from their human capital.

History of Human capital

Human capital has been a concept since the eighteenth century. The monetary value of a worker’s knowledge and the book “An Inquiry into the Nature and Causes of the Wealth of Nations” examined a nation’s wealth, knowledge, training, abilities, and experiences, and Adam Smith referred to the idea.

Adams argued that enhancing human capital through education and training results in a more successful business, increasing the overall wealth of society.
Smith claims that makes it a win for everybody.

The labor necessary to produce manufactured things was referred to by the phrase in more recent times.

However, Gary Becker and Theodore Schultz, two economists who coined the phrase in the 1960s to reflect modern thought, employed the most recent theory.

According to Schultz, human capital may be used to increase the quantity and quality of output, just like any other type of capital.

This would necessitate spending money on employee advantages like better education and training.

What spurs economic expansion

Increased economic activity is known as economic growth capacity to generate goods and services compared to earlier periods.

The change in a nation’s gross domestic product (GDP) is used to gauge economic growth. The gross domestic product measures an economy’s overall output of goods and services.

A country’s economic growth increased by 2.5% from the previous year, for instance, if its GDP rate for the year was 2.5%. Identifying the effects of human capital

Types of Human capital

There exist Many forms of human capital-Knowledge capital; social capital and emotional capital are the categories into which human capital can be divided. Let’s examine a few instances of each:

Knowledge assets

A technical education
College Education
Tough skills
Working knowledge
Knowledge of the context of Intelligence

Unfocused learning initiatives could lead to the creation of pointless courses that will demotivate your staff members. Spending money on learning programs that may not be effective is a waste.

To better match, your learning program with your long-term business goals, try performing a skill gap analysis.

This will show what training your staff requires to increase performance and efficiently work toward those goals.

Social standing

Some sociocultural examples of social capital include opening doors for strangers, returning lost property to a stranger, providing directions, making unsecured loans, and any other positive interactions between people, even if they are strangers.

Relationships
Fame
Social position Professional ties
Health
Emotional wealth

Emotional Capital

The phrase “emotional capital” (EC) refers to a collection of resources that an organization has built up over time with its employees. Herewith investigates how human resource decisions can be impacted to maintain a favorable EC for organizations.

Creativity
Personal resiliency in solving issues
Critically analyzing
Loyalty
Behaviors of leadership
many soft skills

Criticism of the human capital theory

The theory of human capital has drawn a lot of ire from those in the education and training fields.

The theory was criticized in the 1960s partly because it justified bourgeois individualism, which was perceived as egotistical and exploitative.

The middle class was considered part of the bourgeois class since they were thought to take advantage of the working class.

The approach was also thought to turn employees into capitalists by blaming them for any flaws in the system.

A Comprehensive Critique

The human capital idea has significantly influenced several fields, including sociology, economics, and education.

Since its inception, the theory has been the target of vehement attacks, but despite this, it has easily survived and grown its impact over other academic fields.

Unsurprisingly, there have been a lot of criticisms in response to this expansion.
However, these critiques are chaotic and disjointed.

The present study adopts a holistic approach and examines human capital theory from four comprehensive viewpoints with an emphasis on the theory’s methodological, empirical, practical, and moral components to fill this vacuum and systematically arrange them.

Examples of Human capital

Communication abilities, education, technical proficiency, creativity, experience, problem-solving abilities, mental health, and individual resiliency are a few examples of human capital.

Example 1

IBM reskills its personnel as part of its investment in human capital.

IBM unveiled its Getting competitive platform in 2019. Students and adults looking for entry-level work can obtain the skills necessary to be eligible for emerging roles in technology through SkillBuild, which uses AI technology.

People from all walks of life can improve their human capital by taking advantage of this free program. Veterans, refugees, and those on minimum wage are all included in this.

Example 2

One of Adobe’s guiding concepts is that based on customer satisfaction.

For example, they invest in their human resources through their Learning Fund initiative. The initiative offers participants up to $30,000 annually to pursue educational opportunities and degrees.

Additionally, they offer annual reimbursements of up to $2,000 to encourage chances for learning and growth. These may be meetings, publications, online classes, or webinars.

One of the most sought-after businesses to work for today is Adobe because of the learning and development possibilities it offers.

Example 3

Programs for learning and development are more critical than ever for small and medium-sized enterprises.

To stay current with market developments and advance their business, employees in SMBs must continually refresh their skill sets.

The performance of organizations can be increased by 10% by investing in learning and development programs, based on a report published by IBM.

This increase in productivity is essential for SMBs to develop their capacity for innovation and carve out a space for themselves in their particular industries. These characteristics of human capital include:

Technology by itself cannot support ongoing innovation. One of the most creative businesses in the world, Google, is aware of this idea. The tech giant promotes innovation because of this.

Looking for ideas everywhere is one of Chrome’s Eight Principles of Innovation, which promotes open communication among staff members.

Another foundation encourages Google employees to face failure without fear. Employees are encouraged to take chances and present their original ideas without concern about rejection.

Education

The subject of Becker’s research was education. Becker emphasized that paying for education is an investment that raises questions about lost opportunities in terms of time and money.

Students who pursue an education forfeit the chance to work, travel, or start a family.

People would only continue their studies if the anticipated financial benefit outweighed the expense.

The power of our unique skills and talents is placed into perspective by these human capital examples.

One of the most significant forces behind development and innovation is human capital. A content and engaged workforce is another benefit of investing in an employee’s training, education, and well-being.

Vocational training or on-the-job instruction

On-the-job training, also known as workplace training, is when a person learns the job in a real-world setting rather than a simulated one. Employees gain knowledge while working. Consider the situation of roadside mechanics.

Young boys that assist the chief mechanic there learn while doing so. They need to be taught how to analyze defects and repair engines in any classroom using engine models.

The most popular technique is this kind of training, usually referred to as job instruction training. With this approach, the person is given regular work and instructed on the abilities required to do that job.

Health

In addition to serving as an input in creating other types of human capital, health is a type of human capital.
Being unwell reduces one’s capacity for productive work and motivation to invest in human capital.

The concept of human rights denotes good health allows people to reach their full potential; it is also an unalienable human right for children to learn more effectively, workers to be more productive, and parents to provide for their children.

Emotional and mental health

Countries must focus on preventing and treating mental health issues earlier in life to effectively address the lost human capital caused by these conditions.

Since mental health issues often manifest in childhood or adolescence and account for the largest disease burden among children and young people, the economic implications of mental illness start before people reach labor.

However, care and therapy are frequently insufficient or delayed at this period of life.

Children and young people with mental illness are more likely to leave full-time education early and have worse educational performance, which may have a long-term effect.

Being on time, fixing problems, and managing people

Organizations must cater to their employees’ requirements in a precise and tailored manner due to the people-first philosophy of HCM.

However, identifying and meeting their requirements in a meaningful way may take time since many firms strive to manage a multi-generational workforce where employees frequently have varied backgrounds, hobbies, and work habits.

It’s critical to cease generalizing about employees to comprehend their needs and realize their full potential.

Feedback is the best tool for determining employee needs, comprehending how they like to be managed, and incorporating these insights into management methods.

People analytics may be a huge asset in revealing information about your staff.

Limitations of the Human capital Index

Stunting and test scores are HCI components measured infrequently or never in some nations.

In nations with deficient or nonexistent vital registers, other factors, such as infant and adult survival rates, are imprecisely approximated.

Data on enrollment rates, which are required to calculate the number of school years expected, are frequently reported with large lags and contain many gaps.

As a result, the HCI for a nation may rely on metrics that need to be updated and accurately reflect the most current state of a nation’s human capital.

Talents in communication

The labor force’s skills are improved by investing in these attributes. Greater economic output and higher personal income are the results.

Keep your staff informed on the most recent developments in the fields or industries that your company serves if you want them to succeed.

If not, your efforts to improve employee performance and boost productivity won’t be sufficiently targeted, and you’ll end up squandering a lot of money on creating ineffective training programs.

Relationship between human capital and economic growth

An economy can expand thanks to its human capital. Increases in human capital in fields like research, education, and management bring about improvements in participation rates, social well-being, and productivity, all of which support economic growth.

An increase in economic growth generally results in a population with better living conditions.

How to improve human capital economics

More education, automating finances to increase efficiency, broadening your horizons outside of your social and professional networks, gaining experience, increasing participation in various activities or organizations, enhancing communication skills, enhancing health, and growing your network are all ways to increase your human capital.

As nations try to contain the virus, preserve lives, and rebuild their economy, COVID-19 threatens to erase a decade’s worth of human capital gains, leaving a generation behind.

More than 100 million students have missed school as a result of COVID-19.

The World Bank Group has launched the quickest and most comprehensive crisis response in its history to support developing nations in strengthening their pandemic response and healthcare systems as nations worldwide seek to contain the spread and effects of COVID-19.

Human capital risk

The difference between a company’s or organization’s required human capital and the current human capital of its personnel is known as human capital risk.

A corporation may suffer from inefficiencies, an inability to accomplish its objectives, a bad reputation, fraud, financial loss, and, ultimately, liquidation due to this gap.

An organization should train, develop, and support its personnel to reduce and eliminate human capital risk.

Calculation of Risk and index

The fact that the index, based on meticulous micro-econometric studies, evaluates the contribution of health and education to the production of people and nations is a significant breakthrough.
A nation’s score is determined by how far it is from the “border” of full health and education.

If the Human Capital Index is 0.70, it means that children born today would have future earnings potential 70% lower than they would have if they had received a complete education and had perfect health.

Conclusion

Your entire team will have to make a significant financial, time, and effort investment to establish HCM initiatives at your company.

To ensure that you are equipped with the best tools and tactics to make the most of HCM, it is crucial to understand its related problems.

This article adequately informs you about the various obstacles to successful human capital management.

Putting revolutionary spending on social, educational, and health welfare, national leaders need a political landscape, which is being created through the Human Proposed Investment.

The goal is to make quick progress toward a society where every kid can learn effectively in the classroom and enter the workforce as a healthy, skilled, and productive citizen.