An organization's success significantly depends on its workforce, making human capital crucial. Managed by the human resources (HR) department, human capital involves overseeing workforce acquisition, management, and optimization. Responsibilities include strategic workforce planning, recruitment, employee training, development, reporting, and analytics.

Human capital is unique in recognizing that not all labor is of the same quality. Companies can enhance this capital's quality by investing in their employees through education, experience, and skills enhancement.

This investment boosts economic growth and benefits employers. The ROI on human capital is simple to calculate. HR managers assess the total profits before and after investments. The ROI is determined by dividing the company’s total profits by its investments in human capital.

For instance, managers can evaluate the human capital's ROI year-over-year if a company invests $2 million in human capital and earns a total profit of $15 million. This helps assess how profits are evolving and the impact of human capital investments on them.

Formation of Human Capital

Human capital emphasizes education, skills, and training. This area has been shaped by public education in the U.S. Public education overgrew, especially in cities. Children of a certain age had to attend public, private, or homeschooled school. Mandatory attendance laws promoted literacy and social skills, allowing most American youths to finish high school by World War II.

After World War II, the G.I. Bill increased support for higher education. This bill made college accessible to the middle class and wealthy by funding military veterans' education. K-12 and higher education benefited from this trend of government support.

Adam Smith first mentioned human capital in "An Inquiry into the Nature and Causes of the Wealth of Nations." Smith suggested that enhancing human capital through training and education leads to more profitable enterprises, contributing to societal wealth and benefiting everyone involved.

Recently, human capital has primarily been associated with the labor required in manufacturing. However, modern theories, developed by economists like Gary Becker and Theodore Schultz in the 1960s, redefine it to include the value of human capacities.

The Role of Human Capital in Economic Advancement

The relationship between human capital and economic growth is evident. Investment in education and training drives economic growth. People's skills and experience are crucial to economic growth. The amount spent on teaching and training shows this relationship.

Governments often credit human capital for economic growth. Many nations want to improve human capital by expanding higher education. College graduates' salary increases boost consumer spending and the economy.

A well-educated workforce drives economic growth. Education usually improves job prospects, which boosts income. These people can contribute more to the economy, which promotes growth. Skilled workers attract investments and businesses, boosting economic growth.

Human Capital Depreciation

Like physical assets, human capital depreciates. Lower wages or workforce instability are signs of this downturn. Human capital depreciation is caused by unemployment, declining health, and inability to adapt to new technology.

Consider a multitalented person. A prolonged period away from work can lead to these skills becoming outdated or less relevant, especially if their industry evolves during their absence. This scenario underscores the risks associated with unemployment regarding human capital management.

Similarly, individuals who resist adopting new technologies or methods may find their human capital diminishing compared to those who embrace these changes. This adaptability plays a crucial role in maintaining the value of human capital, particularly in dynamic industries.

Examples of Human Capital

One prominent human capital examples is the level of education among workers. Many countries invest in providing accessible or affordable education up to high school and sometimes even through higher education. Investment in education boosts productivity by improving workers' skills and ability to learn quickly.

For instance, more literate people can learn complex new jobs faster. Imagine a high school graduate and a computer science graduate. Nothing could be more different. Countries with more computer science graduates are more likely to undertake economically growing technological projects.

Investing in higher education boosts human capital and economic growth. Workforce training programs are crucial. The government-funded programs increase labor force participation, decrease unemployment, and promote economic output.

Online training courses that offer skills like copywriting or coding represent modern avenues for job training, contributing significantly to human capital management.

Another aspect of human capital is employee safety and well-being. Government-run clinics and employer-provided health benefits help maintain a healthy workforce. In countries with a single-payer system, comprehensive healthcare programs can boost worker productivity by addressing health issues that could hinder performance. These healthcare programs improve health and global economic growth.

Human Capital Theory

From economist Adam Smith's work in "The Wealth of Nations" (1776), human capital theory posits that investing in education and training is crucial for enhancing productivity. It advocates that both society and employers should fund these efforts. Smith argued that specialization and division of labor increase productivity. For human capital examples, someone who has been making shoes for a decade would be more proficient and faster than a newcomer to the craft.

Specialization, especially in higher education where students focus on specific fields (majors), is integral to this theory. Individuals who develop skills in particular areas through degree programs or certifications can produce more than those without specialization. As specialists become increasingly adept at their tasks, their productivity in those areas rises.

Additionally, the theory highlights the benefits of labor division, where workers are assigned tasks matching their skills, aptitudes, and interests, leading to further productivity gains. This approach contrasts with situations where workers might inefficiently juggle multiple tasks or be unable to engage in tasks they excel at, thereby decreasing their output, regardless of their level of education or training.

Critique of Human Capital Theories

Many education and training experts have challenged the concept of human capital. During the 1960s, these criticisms primarily centered on the theory’s support for what was perceived as bourgeois individualism.

This concept was associated with selfishness and exploitation, characteristics attributed to the middle class, who were seen as taking advantage of the working class. The human capital theory was criticized for holding individuals responsible for systemic failures and promoting a capitalist mindset among workers.