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What Is Human Capital?

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Last editedMay 20212 min read

Calculating the worth of a business is usually a matter of surveying numbers on a balance sheet, looking at factors such as income, assets and expenses. Human capital is part of the value of any business, but it is one that is less tangible and much harder to pin down in black and white. Put simply, calculating human capital involves taking into account factors such as the skills, intelligence and experience of a person, as well as their education and assets such as loyalty and punctuality. 

The human capital contained within a business can be boosted by employers through the provision of training and other forms of investment, and provides economic value not just for the individual business but also for the wider economy of a country. 

Although human capital may, at first glance, be more abstract than other forms of value contained within a business, it is regarded as having an important role to play in increasing the productivity of any business. An increase in productivity tends to trigger an increase in profitability, meaning that an investment in employees produce a positive result where it matters the most – on the bottom line. 

Among the qualities that might fall under the umbrella term human capital are the following:  

  • Education

  • Technical or workplace training

  • Punctuality

  • Problem-solving abilities

  • People management

  • Communication skills

  • Good health

  • Mental and emotional wellbeing

Investing in any or all of these qualities will have a twofold effect – it will increase the productivity of the business and boost the earning power of the individual.

Human capital in practice

It’s often said that a business is only as good as the people working for it, and human capital is a formal expression of that idea. All of the employees of a business – from directors and managers through to the newest apprentices – help to make up the human capital of a business and play a vital role in ensuring its success. 

Who is responsible for human capital within a business? 

The management of human capital within a business is usually handled by the human resources (HR) department. HR department is in charge of recruiting and managing employees, and also takes responsibility for longer-term strategies for ongoing training and development. An HR department that has a full grasp of the importance and value of human capital will also undertake reporting and analytics designed to drive a deeper understanding of the human capital within the business.    

Calculating human capital

Using factors such as the amount a company invests in the education and training of their employees, the HR department can calculate the worth and impact of human capital by comparing profits generated before and after the investment was made. In addition, the return on investment of human capital can be calculated by dividing the total profits by the overall investment made. 

Using human capital as a cut and dried figure takes what could be a fairly abstract idea – “investing in your people” – and turns it into something that can be expressed in terms of the business success it helps to drive. 

The history of human capital

The concept of human capital was coined in the 18th century book “An Inquiry into the Nature and Causes of the Wealth of Nations”, by Adam Smith. Smith set out the idea that boosting human capital through training and education would make any business more profitable and this, in turn, would make society as a whole wealthier.

The term itself was coined in the 1960s, as economists such as Gary Becker and Theodore Schultz put forward the view that it could be used like any other form of capital to improve the quality and quantity of production within a business.   

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